Green Dot Corp (GDOT) 2011 Q2 法說會逐字稿

Greetings, and welcome to the Green Dot Corporation Second Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions)

It is now my pleasure to introduce your host, Dara Dierks, an associate from Green Dot Investor Relations. Thank you. Mrs. Dierks, you may begin.

Thank you, Operator. By now, everyone should have access to our second quarter 2011 press release. It can also be found at www.greendot.com under the Investor Relations 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 may be calculated differently than other companies' 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 2011 guidance on a non-GAAP basis with a reconciliation to GAAP which appears in the financial information section of our IR site.

Finally, before we begin our formal remarks, we need to remind everyone that part of our discussion today will include forward-looking statements. These statements are subject to the numerous risks and uncertainties that could cause actual results to differ materially from what we expect, and you should therefore not put undue reliance on them.

Some of those risks are mentioned in today's Form 8-K filing with the Securities and Exchange Commission, others are discussed in our 2010 annual report on Form 10-K, which is 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, to our Q2 earnings call. With me here at our Monrovia, California, headquarters is my close partner and Green Dot CFO, John Keatley. There's a lot of information we want to share with you today, including important updates on a variety of regulatory matters, and we appreciate you listening in.

So first, let's start with our Q2 financial results. Every quarter since going public almost exactly one year ago, Green Dot has met or exceeded the guidance we gave on the road show, and we have consistently achieved the financial results needed to meet or beat our annual guidance for 2011.

We know there was some concern from the Street last quarter that Q1 was huge, but it's as good as it gets and that we couldn't continue to grow at that pace. Well, while it's true that Q1 was our biggest season, we're proud to say our goal is to make sure that high growth is always in season at Green Dot. And in Q2, we've done that. The dot is green indeed, and I'll share with you some highlights.

Non-GAAP total operating revenues increased 29% for the quarter to $119.4 million. Adjusted EBITDA grew 26% for the quarter to $29.1 million. On an apples-to-apples basis, adjusted for the Wal-Mart renewal in May of 2010, adjusted EBITDA actually grew a stunning 42%.

I'm also pleased to report that while growing both revenue and adjusted EBITDA nicely, we also expanded margins by two percentage points on a pro forma basis, despite the heavy investments we continue to make in staffing, product development, marketing and the bank holding company application.

The number of new cards activated increased 23% year-over-year to 1.8 million new accounts activated in the quarter. New customers who reloaded their card for the first time grew 29% year-over-year to nearly 800,000 new reloading cardholders in the quarter. The number of active cards as of end of Q2 was up 27% year-over-year to 4.1 million active cards.

Gross dollar volume was again way up in the quarter, up 53% year-over-year to $3.6 billion loaded to our products in Q2. Direct deposit activity on our cards continued to soar in Q2 with dollars loaded via direct deposit of 103%, representing 48% of GDV loaded to our cards. And finally, cash transfers through our Green Dot reload network increased by 29% year-over-year to $8.3 million cash transfers in the quarter.

I want to thank and congratulate our Green Dot team members from across the Company and around the world who worked so hard to deliver another outstanding quarter. John Keatley will provide some more detailed color on these metrics in his financial report coming in just a few minutes.

On the biz dev front, I want to welcome some new clients of note to our company. First, I'm pleased to welcome American Express as a customer of our Green Dot reload network. Green Dot is proud to be the only method of reloading cash to an American Express prepaid card. This includes their Amex PASS prepaid card targeted at young people and their new GPR Amex prepaid card targeted to bank customers that you've all heard so much about.

We're proud of our partnership with American Express and are excited they've chosen Green Dot to help them serve new segments of prepaid customers with their new and innovative products.

Next, I'd like to welcome ADP, the payroll processing giant, as another new customer to our company. ADP has a new payroll prepaid card product in the market called ALINE. It's issued by First California Bank. That card will be reloadable on the Green Dot reload network so that customers can -- receiving their payroll on the card can also deposit cash at any one of our 55,000 Green Dot retail locations nationwide.

Our Green Dot interactive channel continues to click along nicely and is really starting to deliver meaningful value to the Company. New cards activated and funded through greendot.com and walmartmoneycard.com increased 90% year-over-year, and we're still very early on in this channel's development.

Our online sales division is now a top five card acquisition platform for Green Dot, and has grown to become larger than many of our retail partners at this point. I'm also pleased to announce that Green Dot has secured significant new placement in merchandising programs at four of our top five retail partners, including Wal-Mart and Walgreen's.

As you know, same-store organic growth, even after a decade in the market, continues to be one of the largest growth drivers in the Company, and our retail sales division has done a terrific job in collaborating with our largest retail partners to find new and creative ways to showcase our products and services.

Now, let's talk about regulation. Clearly, regulation has been the elephant in the room as it relates to our company's story for the past few months, and I'm happy to now share some developments with you.

So first, let's start with the Durbin Amendment and how the rule-making established by the Federal Reserve impacts our business. On June 29th, the Federal Reserve issued the final rules under which the Durbin Interchange Amendment will be implemented, as relates to debit cards and prepaid cards and the terms and conditions required for a prepaid portfolio to be exempt from the interchange restrictions contained in the broader provision.

After a careful review of these rules and the associated commentary issued by the Fed, we held detailed conversations with Green Dot inside and outside counsel, our issuing banks and their legal counsel, and the network brands under which we issue our prepaid cards.

Initially, we participated in an industry conference call with the Federal Reserve's legal staff where we were able to hear clarifying comments about the rules and their underlying intent.

Based on the totality of these discussions and learnings, we then undertook a careful and detailed top-to-bottom review of the structure of our card programs, the features and functionality of those card programs, and the operational methods we used to facilitate those card programs.

Based on all this, I'm pleased to announce that we have concluded that all of Green Dot managed programs, including our Wal-Mart MoneyCard program, will be exempt from interchange restrictions under the Durbin Interchange Amendment and, therefore, our programs will not be subject to lower interchange, nor restricted interchange when the rules go into effect on October 1st.

As it relates to our Wal-Mart MoneyCard program, our product growth map had anticipating already -- had anticipated already adding a fee-free ATM network in this portfolio beginning in 2012. As it turns out, adding this network will also more than fulfill the July 2012 free ATM exemption requirement under Durbin.

As many of you know, we have had a free ATM network on our Green Dot branded cards for some time now, so we can predict with experience and confidence that the financial impact of adding a similar free ATM network on the Wal-Mart program will have a revenue neutral or slightly positive financial impact in 2012.

The reason is is that there are some additional costs of about 1% of company revenue to implement this service, but the cost is easily offset by increased revenue resulting from higher usage and retention from our best customers as a result of adding this feature. There is no impact in 2011.

Lastly on this topic, we have heard concerns that perhaps Wal-Mart will somehow force Green Dot to make their program non-exempt for one reason or another. I want to use this opportunity to be clear that we have had numerous conversations with our partners at Wal-Mart on this topic, and we are both in firm agreement and complete alignment that we will take all necessary steps to ensure the MoneyCard program is exempt from interchange restriction.

Being exempt under Durbin is clearly a superior economic result for Green Dot, Wal-Mart, and our millions of Wal-Mart MoneyCard customers who today benefit from one of the lowest cost products on the market.

So in summary, we could not be happier with the outcome of this important issue, and we're excited to be able to report this positive news to you today.

Next on the regulatory front, I want to address the new FinCEN rules for prepaid access, which were just released a few days ago on Tuesday. So here's the background. On June 28th last year, FinCEN proposed a series of new regulations addressing prepaid access devices. Green Dot has always supported FinCEN on this issue and believes that new tougher standards are important for the safety of our country and for the ongoing sustainability of the prepaid industry.

As part of the rule making process, FinCEN solicited comments from interested parties on the proposed rules and, of course, Green Dot made its submission for their consideration and review. As I mentioned earlier, FinCEN has now released those final rules, and they will go into effect approximately 60 days from now.

We have carefully reviewed the new rules and any potential resulting implications, and we have fully evaluated our current processes and operational methods to determine how these new regulations might affect the way in which we currently sell our products.

I'm pleased to announce that we have concluded that the new FinCEN regulations will not harm Green Dot's business, nor will these new regulations negatively impact the method by which Green Dot currently sells products at our network of retail stores nationwide.

We believe FinCEN did a great job of coming up with a set of new rules that will provide for better oversight and control of potential terrorist financing and money laundering, while at the same time not harming the legitimate use of prepaid products or stifling innovation in our industry. We know there was a lot of investor concern around this issue so we're pleased to be able to report such good news today.

The next issue I want to cover is Florida Attorney General Pam Bondi's investigation into the prepaid card industry and her office's subpoenas requesting information from five prepaid companies, including Green Dot.

First, I want to be clear that all of us at Green Dot support Attorney General Bondi's investigation and believe she is right to do what's needed to ensure the citizens of Florida can benefit from reloadable prepaid cards that are fair, well-disclosed and pro-consumer in their design and function.

We agree with Miss Bondi that there are many prepaid card issuers and program managers who market cards interstate but that not all of them have the consumer's best interests at heart.

I along with key members of our senior executive team recently traveled to Orlando, Florida, to meet with the Florida AG's office and answer questions regarding Green Dot's products and services. While I'm unable to relay the content of the meeting or any details regarding our discussions, I can say that the meeting was constructive and collaborative and that Green Dot expressed a strong willingness to cooperate with Attorney General Bondi and her office with the goal of working towards an appropriate resolution.

We know this matter is important to our investors, our employees and all our stakeholders, and we will continue to keep you updated as developments warrant.

Lastly, I'll bring you up to date on our pending application to become a bank holding company and to close on our purchase of Bonneville Bankcorp in Provo, Utah. Our legal team has been working nearly around the clock over the past few weeks in an effort to wrap up the final details needed to provide our regulators with all the final documentation needed to formally consider our application.

While the timeframe for review and decision making on our application has taken somewhat longer than we had originally anticipated, we remain optimistic for a successful outcome. Of course, there are certainly no guarantees on the application's approval, and we are still anticipating a decision later this summer. So as soon as we have an update, we'll let you know.

Okay. Now I'll hand the call over to John Keatley with more color on our strong Q2 financial performance. And after John's report, we'll go straight to Q&A. John?

Thanks, Steve. As Steve mentioned, we were pleased with our strong results in Q2. We continue to show very strong top line growth, consistent with our guidance, and are also demonstrating margin expansion despite the heavy investments we're making in our business.

Let's review the financial results of the quarter in more detail, as presented in the supplemental materials available on our website. Slide number nine shows the growth of the components of our non-GAAP total operating revenues. Overall, revenue grew faster than our active card portfolio, indicating that our revenue per card continues to grow.

Card revenues, which consist primarily of monthly maintenance fees, ATM fees and new card fees, grew 28% in Q2 to $53.9 million for the quarter. We were encouraged to see that card revenues for active card increased year-over-year, despite the fact that more customers are having their monthly fees waived and taking advantage of our fee-free ATM network.

Cash transfer revenues grew 33% in Q2 to $32.4 million, driven by heavy reload activity both from our own cardholders and from our network reload partners. Interchange revenues grew 26% year-over-year to $33.1 million in Q2. I want to provide some color on how interchange revenues grow for you. It used to be, going back a few years, that GDV and interchange grew somewhat in lockstep, because most of our users loaded cash and spent the full value on purchase transactions, which generate interchange.

But as our customer base has become more mainstream and our cardholders are increasingly using their cards as a bank account substitute, the relationship between GDV and interchange has become less tightly linked.

The reason is that direct deposit customers tend to use their cards for a wide range of transactions needed to manage their finances. This includes online purchases, offline purchases and cash withdrawals.

While purchase behavior generates interchange revenue, ATM transactions and cash back at the POS transactions generate little or no interchange. These direct deposit customers tend to generate far greater lifetime revenue through longer retention and fees paid over the life of the card.

So while higher direct deposit penetration causes interchange revenue as a percent of GDV to decline, it is a big net positive to our business and an interesting modeling note to be aware of as you look at GDV and interchange revenue.

Moving on to slide 10, we see the components of operating expenses as a percentage of non-gap total operating revenues. We saw some nice efficiencies in several expense areas despite the heavy investments we have made in our business over the past year.

Sales and marketing expenses, when adjusted for the Wal-Mart renewal in May of last year, declined approximately one percentage point year-over-year from 36.7% of non-GAAP total operating revenues to 35.8%. As a reminder, we were paying very low commission rates to Wal-Mart in the early part of 2010, prior to our five-year contract renewal.

Compensation and benefits expenses remained roughly constant as a percentage of revenue at about 18%. We significantly increased staffing in several areas of the Company over the past year, including information technology, sales and marketing, risk management and compliance.

This hiring is in support of several key growth initiatives in the Company, including our bank holding company application, new product development initiatives, and new sales efforts like our government channel.

Processing expenses declined from 15% of revenue to 14.5% of revenue, due to volume incentives from our bank partners and from the payment networks. Other G&A expenses declined as a percent of revenue from 12.2% to 11.6%, due to economies of scale.

As we turn to slide 11, you can see our non-GAAP revenue growth. Our non-GAAP total operating revenues grew to $119.4 million in Q2, an increase of 29% over the prior year. As we've mentioned before, our business does show seasonality related to tax refunds in Q1. While sequential quarterly growth follows seasonal highs and lows, our year-over-year growth continues to be relatively constant and very high, and Q2 is another good example of that.

Slide 12 shows our adjusted EBITDA, which grew to $29.1 million. If you compare our Q2 EBITDA to last year on an apples-to-apples basis, adjusted for the May 2010 Wal-Mart renewal, it grew by 42% year-over-year, and our adjusted EBITDA margin increased by two percentage points from 22% to 24%.

This margin expansion is even more impressive when you consider that this period of time in Green Dot's life is an unusually expensive time for us. We grew our staff by over 30% in the past year. We paid outsized professional services and legal fees in the quarter as we worked through our bank application process and responded to the Florida AG inquiry. We also heavily stepped up a number of new product development and retail merchandising initiatives and continue to spend heavily on marketing.

And, finally, we also absorbed the cost of new compliance initiatives in the quarter, like full Reg E coverage, payroll card standard for our GPR cardholders, which we believe none of our competitors are doing today but will be required to do at some point in the near future.

So we experienced high expenses in the quarter, and yet we're still able to expand margins quite nicely. We believe this bodes well for future margin expansion as we move towards more of a steady state operating model over time and are able to stabilize expenses more so than today.

Slide 13 shows that our non-GAAP net income was $16.3 million for the quarter, an increase of 5% year-over-year, or 16% on an apples-to-apples basis, adjusted for the Wal-Mart renewal.

Non-GAAP EPS was $0.37 for the quarter, versus $0.36 a year ago. Non-GAAP net income last year benefited from an unusually low effective tax rate, as well as the lower commission rates that we paid to Wal-Mart last year.

Our balance sheet continues to be a source of strength for the business. We ended the quarter with approximately $183 million of total cash, including $10 million of restricted cash and $173 million of unrestricted cash and cash equivalents.

Additionally, we had $40 million of available for sale investment securities. Our total cash, cash equivalents and available for sale investment securities increased by $12 million during the quarter, and we remain debt-free.

For the full year, our guidance remains unchanged. We project non-GAAP total operating revenues of between $490 million and $505 million, which represents growth of 30% to 34%. Adjusted EBITDA of between $117 million and $123 million. This represents growth of 19% to 26% or 35% to 42% on a pro forma basis, adjusted for the Wal-Mart renewal last year.

In Q3, we're expecting revenues to be roughly flat with Q2, an increase of 25% to 30% year-over-year. In Q4, we expect a sequential bump in revenues, driven by seasonal trends, combined with the impact we expect to see from some of our marketing and in-store initiatives.

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

Thanks. Very good, John. And now, we'll go straight to Q&A. Operator, please open the phones.

Thank you. We will now be conducting a question and answer session.

(Operator Instructions)

Thank you. Our first question comes from the line of Jason Kupferberg with Jefferies & Company. Please proceed with your question.

Hey, thanks, guys. Good afternoon.

Hey, Jason.

Wanted to just start with a follow-up Durbin question, if I could, just to try to get a little more clarity, because I know there was some language in there about restricting ACH-based access to cards that are exempted from Durbin. So that has led some folks to think about bill pay features, for example, on your cards.

Is there any impact there at all in terms of your ability to continue offering bill pay in the context of some of those ACH restrictions?

I can't go into the specifics of how we interpret the law, because a lot of those conversations were held either with counsel or with regulators on a confidential basis.

Let me help give you the right guidance. I think it's fair to say that whatever changes, Jason, we may need to make would be at the fringes, way at the fringes of how the cardholders use our services and would not have any impact to usability of the product or growth projections of the Company or margins or retention or usability or anything of that nature.

So the answer is we may need to re-route certain kinds of ACH transactions; in other words, where somebody gets a hold of their ACH number accidentally or in some other manner, and we're looking at that, but nothing that would impact the vast majority of our users or would be noticeable in any financial model.

Okay. Very good to know. And just a follow-up, would just like to get your high level thoughts as you look out on the prepaid industry over the next, 12 to 18 months, for argument's sake. How do you see consumer pricing trending in the industry?

Well, we think it's pretty much where it is. The Green Dot and Wal-Mart products, for the types of products they are and the services they provide, are still far and away the cheapest in the market, and we know that there is new entrants that have lower fees, Western Union, and Amex have some lower fees in some cases and we may talk about that later.

But we feel good about the pricing. We don't feel pressure in that regard from our retailers or our customers, and the research continues to show that we're a great value, and we think the metrics that John Keatley just read off for you are the best evidence of that.

So whether it's 12 or 18 months or going forward, we feel good about pricing, where it is for our products.

Okay. If I could just sneak a quick one in, just because you prompted me a little bit with some of your comments. But just thinking about the banks going forward post-Durbin, I know it's still early days, but the big money center banks, for example, any sense of what they might be planning to do in prepaid; and if so, how that could impact you guys?

And I guess on one hand, it could further legitimize -- legitimize the whole market, but is that something you guys are thinking a lot about or just kind of taking a wait-and-see approach on?

Well, I suppose neither. I think we're thinking about it, but we don't have a strong belief that there's anything coming over the horizon that's significant from large banks, and really less so now.

When the new rules came out with Durbin from the Fed at the end of June, you almost could hear the air sucking out of the balloons at major banks in terms of their desire to move forward with some of those programs.

Right.

And we think -- and you may have heard that elsewhere. The reason we think this is the case, and I'm trying to think how to best answer this in a way that's helpful and doesn't over disclose, but there were a number of large banks who had thought about doing these kinds of programs and, to be fair, may still be thinking about it.

When Durbin came out, the interchange rate was so much higher than most banks had forecast on the one hand, so the loss in revenue wasn't all that big a deal based on their initial thoughts.

And then at the same time, when all the new regulation came out on what a prepaid card has to be and that it has to include the first free ATM and that it can't have overdrafts and this whole list of various things, combined with some of the new state regulatory pressure in Florida, my sense is that what a lot of the banks thought is, why are we doing this and why are we bothering?

There's now so much more money to be made by calling it a checking account, even if it's a checkless checking account, and offering it to customers as they are today, to students and entrants, new entrants into the bank branch, that offering a prepaid card just seems to make so much less sense today at a bank than it may have two months ago.

So there may be some big money center banks, as you call them, looking to do something. We've seen a lot of that inbound activity at our company, anyhow, slow down in terms of inquiries of banks. And if I were a bank, I'd probably be making the same decision.

So there could be something on the horizon, but nothing that we see or that has us excited or concerned, I guess, is the best way to say it.

Okay. I appreciate the comments, guys. Thanks.

Thank you. Our next question comes from the line of Glenn Fodor with Morgan Stanley Smith Barney. Please proceed with your question.

Hi. Thanks for taking my question. Just want to touch on the competitive environment given the recent dynamics out there. I mean, how do we think about how defensible your current position is with your retail partners? In the past, this has been couched as -- it's kind of like annuity stream that they receive from the cards issued historically, and merchants wouldn't want to give that up to switch providers.

But when you think about the relatively short life of these cards on average, about a year or so, I mean, can outstanding cards alone be enough to fend off new entrants who are going to try to pick off your retail partners?

Well, I think it's a lot of things, and John Keatley can address the value that the reload network brings mathematically. But it's not just about retention of any one card. It's about the growing portfolio base that continues to rise year-over-year, and the numbers of reload transactions on the reload network are pretty significant, and they grow vitally year-over-year.

John, what did we do in the past 12 months? It's got to be [some odd] million.

Yes, and we're up 29% again this year on reloads. And Glenn, a large proportion of those reloads actually do come from older cards, so you're right that the average life of a card is around a year, but there's really a long tail on that. So actually, a significant portion of reloads come from very old cards.

And it's a big portfolio, so I wouldn't -- I don't mean to overplay that, but I wouldn't describe it as couching it or a minor issue. The numbers of Green Dot money pack and reload transactions we do at retail are fairly significant. We also sell a lot of the cards, but there's more to it than that if you're a retailer.

So let's pretend you're a retailer now and you're talking to a salesperson from another company. You have questions about the brand and the notoriety of the brand, meaning positive attributes and consumer perception. You have a lot of questions about regulation.

You have a lot of questions about IT and how that IT integrates into their POS system at that retailer, which is a very, very, very long-term and highly complex integration. You don't just walk into some place and do that overnight. You have issues of shelving and slotting and merchandising and marketing, and all that has to be worked through before a decision can be made to have a package put on the shelf, right.

So a lot of things have to be considered for that. So we're not saying that we're unbeatable or that we'll never be replaced in a retailer or that kind of thing. I guess anything could happen. But it never has happened. We continue to renew contracts fairly regularly from all of our biggest retailers, and our notoriety with consumers or our popularity with consumers and others continues to grow, right.

So, I think there's more to it than just the network. And for all those reasons, we feel good about our retail contracts. And, of course, history shows that we've done a good job there.

So, it may be that somebody gets put on a shelf next to us. That could certainly happen at retailers where we're not exclusive. And if that happens, that happens. But for us to be replaced is not something that I can honestly say has ever come up in any conversation with any retailer ever.

Do you have any statistics you can share with us on -- if you buy a card from a certain retailer, you know, it's an 80% probability that they will reload at that same retailer? Do you have any color like that?

There's one stat that I can share in that regard. It varies retailer by retailer; but typically, a retailer will receive about half of their reloads on the Green Dot network from cards that were not sold in that retail chain.

So about half their reload volume comes from the cards that they sold, and roughly half come from other Green Dot programs or third party programs, like H&R Block and RushCard or others.

Okay. That's helpful. Thank you, very much.

You bet. Thank you, Glenn.

Thank you. Our next question comes from line of Julio Quinteros with Goldman Sachs. Please proceed with your question.

This is actually Roman Leal in for Julio. Just one more follow-up on the Durbin issue. I think up until now, we've been focused on the large banks. But have you heard any rumblings or spoken to any of the smaller banks -- I think, that given that they're -- especially those that are sub-$10 billion in assets, they don't have any of these restrictions on ACH, etc., they can offer a fairly more competitive product than a large bank could now, given the final Fed rules.

Just curious to see, I mean, do you think that will -- would it be easier for you to partner with a smaller bank versus, say, a larger bank?

The answer is that partnering with a smaller bank would be helpful for certain kinds of features and services. Of course, if we're successful on getting our own Green Dot Bank, that would certainly be a bank that would qualify under that exemption.

But there are other banks who are experts in the prepaid industry, Bancorp and others that are small banks, and many more getting into the market so we do tend to see -- that's a good question, Roman. That we do tend to see a frenzy of smaller banks saying, hey, Green Dot, can we help? Can we play? Can we be part of this?

And there may be opportunities there. But we're in no huge rush to do anything because we're exempt as of today. So it would be more of a belts and suspenders kind of a move going forward. And we always look at developments in that way.

Great. Thank you.

Thank you. Our next question comes from the line of John Rowan with Sidoti & Company. Please proceed with your question.

Good afternoon. Do you have the average card lifetime?

Yes, we do. We disclosed it in our 10-K, I think was the last time it was put out there, of around nine months. Which is, you know, across all of our programs. That's the average life of a card that we disclosed for accounting purposes.

But has it changed at all from that nine months, or do you not have that?

Not materially, no, it hasn't.

Okay.

Remember, we're in the business of segments. Right? So it's kind of -- when you put it all together as an average, I'm not sure how particularly indicative that is or helpful, but it is what it is.

Okay. And what are the securities you hold on your balance sheet?

They are highly liquid, short-term investments. You know, it's -- I guess we haven't shared a lot of detail on them. They grew to 40 million this quarter, and it's highly rated commercial paper, corporate bonds and treasuries is essentially what's in there.

Okay. And just one last question. On the guidance, it shows $24 million for stock-based retailer compensation expense. That's obviously a lot higher than the run rate year for the quarter. Why is that number at $24 million, and is that what's used in the GAAP guidance of $39 million to $45 million?

I'm sorry. Which number are you referring to?

I was referring to the $24 million of stock-based retailer compensation expense.

Yes.

Isn't that at $24 million in the financial supplement?

Okay. Let me see. Yes, that sounds right.

Okay. Why is that meaningfully higher than the run rate in the quarter here of $4.4 million?

Okay. So you're talking about the stock that we give to Wal-Mart?

Yes, just on the -- just looking at the financial supplement that you guys have out.

Sorry. Can you tell me what page you're on?

Maybe we can follow up with after -- it's kind of fun watching John flip through about 80 pages in front of him. So, keep going. I'm enjoying the show.

Sorry. Give me one second. I just actually printed out the one page. I think it's 22.

Okay. So, you're in the appendix. You know what? John, maybe I should follow up with you on that one. If you're talking about the stock-based retailer incentive comp, that's just the investing of the stock that we gave to Wal-Mart, which vests each month based upon our stock price at the end of the month.

I know, but it seems like the assumption there is for -- a $53 stock price, where your stock's at $32. I just wanted to know if that filtered into then the net income guidance on the bottom of $39 million to $45 million.

Oh, okay. All right. Let me follow up with you. It's a good question.

Yes, and you win the prize for today's edition of stump the CFO. I don't think that's happened in --

Dubious honor.

Yes, okay. I'll follow up.

Thanks, guys.

Thank you. Our next question comes from line of Tien-Tsin Huang with JPMorgan Chase. Please proceed with your question.

Hey, guys, I'll try not to stump you. On the -- I guess I'll ask a regulation question. The update was helpful. Sounds like it's mostly good news there. But I'm curious if the new Durbin rules, the way they wrote it out, changes your desire at all to buy the bank still here, the Bonneville Bank.

No. I mean, if anything, if it had any effect, it would make us more desirous of having that bank. But no, the reasons we initially set out to buy the bank are the same today, and that's product innovation, the regulatory certainty and vertical integration. And I think all of those apply as much, if not more so, than they did a year and a half ago when we began the journey.

Okay. I just wanted to make sure. And then on the competitive front, I know Jason asked the question. But you mentioned American Express. You know, their fee-free product has gotten a lot of attention, at least in the investment community.

So I'm curious if that's had any implication at all for your business in terms of whatever, share shift or mixed shift or if that's actually driving you guys to rethink your pricing strategy, especially with the Wal-Mart card, knowing that they're typically the low cost leader.

No. And, I mean, the answer is it hasn't. And I guess I can talk, if it's helpful, about the Amex card and about competition and pricing in general, but the short answer to your question is no. And then if you'd like me to go more in depth, I'm happy to, I guess.

If you could, maybe just compare and contrast the products for us, that would be helpful.

Okay. Well, so first of all, I think everybody on the call knows we're partnered with American Express as the reload network for this and their other products. So in that context, we wish them all the success in the world because we hope to drive significant reload volumes to our network.

But, here's our thought about the Amex product, and then we'll talk about competition and price compression in general, which I think part of what you're asking and what we've heard elsewhere.

So on the new Amex product, from looking at the marketing collateral and reading the terms and conditions which you all may have done, it's fairly clear that Amex is marketing this product to more of an upscale user, someone who already has a primary checking account, let's say, at a bank or maybe somebody already has an Amex credit card.

And the card does not appear to have the right utility for a customer who is unbanked or underbanked, who is our primary customer. And it has no utility for somebody looking for a bank account replacement product. And let me tell you why.

So first, the Amex prepaid card is not issued by a bank, and it is not FDIC insured. And the implication of that is that the card cannot be legally used for the direct deposit of government benefits, tax refunds, or any other kind of government disbursement. And the card today does not allow any kind of payroll direct deposit. So, you can't have your wages or payroll put to the card.

The card is also not designed, Tien-Tsin, for customers to easily withdraw cash on a regular basis. The reason is they have low ATM withdrawal limits. In other words, you can only get out $200 in cash. And the ATM fees are actually fairly steep. Amex charges $2 for the ATM, and they waive the first one. But what isn't apparent unless you understand the industry or unless you're a customer is that you also have to pay the ATM owner a fee of typically $2.50 or, in the case of major banks, $3 to use their ATM machine.

So, that means the customer's paying $5 on average all in for an ATM transaction. For the first transaction, where Amex waives the fee, it's $2.50 on average. So, that's expensive. And lately, as the acceptance of the Amex card at merchants where Americans make less than $50,000 a year shop. And this is not in any way a cut on Amex. This is all just taken from public documents, and I hope folks hearing take it in that context.

But Amex has great acceptance in large merchants and travel and entertainment categories, but they have more limited acceptance at other types of merchants. So according to public documents, they have about half the acceptance of MasterCard and Visa overall, but our understanding would imply that their acceptance is much less than half of MC and Visa in neighborhoods that -- where underbanked and underserved people live. Right?

If you were to kind of think of neighborhoods where customers are, Amex would not be something you would see on every storefront.

So we think the Amex card is a great value for a certain more upscale segment of users looking for, say, a travel card or a budgeting tool or a way to pay allowance to a child or a nanny, perhaps. Or an au pair for you guys in New York and upstate. But the Amex card is not free. And frankly, this is the one that I think has been most misunderstood by analysts and others covering our stock.

So if it's okay to keep going, let me talk about fees for a minute. The Amex card has no up-front fee if purchased online. The card has no monthly fee, and the card has no fee to ACH money transfer from a bank account to the card. In other words, if you want to put money on the card, you can use your check account to do that at no cost.

As a comparison, the Green Dot card also has no up-front fee when purchased online and also has no charge to load funds from ACH transfer from a bank, and also we offer direct deposit for free as well. Both the American Express card and the Green Dot card charge $4.95 for cash reloading.

So the only two differences in the pricing between the Amex prepaid card and the Green Dot card is a monthly fee, right, and the ATM fee, which we talked about earlier. In our case, we also waive our monthly fee for best customers, and the Amex card does not have a monthly fee. And we have a large fee-free ATM network where the customer pays nothing to withdraw cash, and Amex does not have a fee-free ATM network, although they waive their first $2 fee.

So, what does that mean if you're the customer? So the ATM fee is important, because that means if you do just more than one ATM a month on the Amex card, you've already spent more than the entire monthly fee on the Green Dot card, right? Plus, for most of Green Dot's best customers, they're already not paying any monthly fee on our cards anyway because of our fee waiver plans.

So for a person looking to use a prepaid card as a money management tool or a bank account replacement, the Green Dot card would be much cheaper, have much more utility; in other words, you can use it for direct deposit and so forth, and it has all the acceptance advantage of MasterCard and Visa over Amex in the neighborhoods where our customers shop. So, that's that part of it.

And I don't mean to make this question go on forever so I'll shut up whenever you say, but I also -- maybe it's helpful to talk about competition. Because again, on this topic, the Amex question is always rolled into pricing and competition and the Amex card. So is it okay to keep going, or do you want me to move on?

Go for it. I won't ask a follow-up, and we'll end it at that.

Thank you. Everybody else on the call -- we have extra time for Q&A for those of you waiting. But I think it's important to cover, right, because these are the kind of things people keep asking about.

Okay. So maybe it's helpful for me to give you a sense of how our customers react to competition in general. So, Amex may or may not be competitive to Green Dot at the fringes, as we discussed. And large banks may or may not one day rule out a GPR card or various features or pricing like we got asked earlier in the call.

But there's really, in my view, no need to speculate on theoretical competition because there are many programs that exist today in the marketplace for real that do, in fact, compete with Green Dot head-on, dead-on, right now every day on a MasterCard or Visa acceptance mark.

So maybe we can look at some of those real-life comparisons to provide some color. So in reality today, we compete head to head with NetSpend, Western Union, RushCard, Blackhawk Networks, AccountNow, H&R Block, First Data, and something like over 800 other smaller GPR programs targeting unbanked and underbanked Americans, all of them on a MasterCard or Visa label.

We're not sure if all this competition has expanded the market, to be honest, or stolen market share from us. We don't know. But whatever the case may or not be, our growth rates and active card rates are real, despite of or because of this competition that's in the market today.

On the matter of price compression and price competition, competitors selling cards at low fees and no fees is nothing new to the category. And for those of you who cover the category, you know this. H&R Block has been out for three or four years with a card that has no fees other than a cash reload fee and an ATM fee, and the Western Union card has no monthly fee.

In fact, for those of who worked with us on the road show, you remember Western Union was a big story that was played against us in the IPO road show. So at that time, the big question -- this goes back a year ago -- was, hey, won't Western Union destroy your pricing? Won't Western Union convert all your customers? They have no monthly fee. You know, really similar to the things we're hearing today about Amex.

And here we are some 14 months after the launch of the Western Union product, and I believe in the conference call a few days ago, they announced that total loads to all of the Western Union prepaid portfolio was about $120 million in the quarter, and they downgraded their growth expectations on the number of cards in force.

In the same period, Green Dot had loads of $3.6 billion, representing a 53% increase year-over-year. Now look, Western Union may expand their program and make some inroads in the market so I don't mean to bash their program. That's not my goal here. And there's plenty of room for lots of quality players in the space, and our industry is still very early in the game. I'm simply discussing the point more illustratively in the context of competitive analysis.

But it's fair to say that Western Union hasn't had the impact that some prognosticated in the past, and my sense is that we hope the Amex card is wildly successful, but you may see similar challenges there as well.

So to be sure, we take all competition seriously. We never for a moment believe we're unbeatable. In fact, we may be downright paranoid about that. We obsess constantly over making sure that we remain number one, and we know we're not going to win every battle. That's the nature of business.

But when you see our growth rates historically and our current growth rates on all metrics and then you look at how competition has played out historically against Green Dot over the years from many, many competitors, I think the evidence would be fairly clear that it's hard to stop a fast moving train by throwing a rock on the tracks.

And again, we mean that not in a hurtful way to competitors, but I do think it's helpful to provide that context.

No, it is. No, thanks for that, because it's easy for us. You know, we want to compare things in a very simplistic way so it's easy for us to just distill it down to a couple items. But it's good to hear you think about it in a broader context. So, thanks. I'll jump off and get back in the queue.

Thank you, Tien-Tsin. We appreciate it.

Thank you. Our next question comes from Ashwin Shirvaikar with Citibank. Please proceed with your question.

Thanks. My first question is for John. Did you say that sequential growth patterns would be sort of similar to the past, you know, sort of flat-ish sequentially for next quarter and slightly above for the one after?

Yes, I said -- I think on the last call, I said sequential patterns would be similar to last year. I think it's probably playing out slightly differently this year. I guided that Q3 revenues would be roughly flat with Q2 this year, which is pretty similar to last year, and that we're expecting a little more of a sequential bump in Q4 this year. We have some initiatives in place that we expect to deliver some extra growth in the last quarter of the year.

Could you go into some of those factors, perhaps, because, you know, if it's a -- it may take a fairly substantial bump to take you beyond anything more than the lower half of the range that you have.

Right, yes. Well, I can't go into a lot of detail on these initiatives, just because they're confidential with our retailers at this point. But Steve did mention at the front of the call that we have significant in-store merchandising and promotional activities lined up for the fourth quarter of the year at four of our top five retailers, which together account for more than 90% of our sales. And we're expecting some good results from those initiatives.

Okay. And then one question I had was again going back to Durbin, not to belabor that way too much. But with regards to the final fed rules, did that -- through your own process of investigation, does that cause you to potentially modify any product features that you might have been planning in the future and to potentially walk away from those kind of features?

Well, it's certainly going to influence our thinking as we do the compliance review. In other words, whenever we do a new feature or service, whatever it might be, there's a whole change control and compliance review process that has to happen before that product gets quoted and rolled out.

So clearly, a cautious review of the Durbin rules will now be part of that compliance review, right. So it's hard to say would there be something impacted or not. But clearly, we're going to have that on our mind as we roll out any new feature.

Okay. And last, I guess my last question is, I probably missed this, Wal-Mart has a percent of earnings?

Yes, that's right. We haven't put that out this time. We'll put it in the queue after we complete calculating the rev shares and some of the other products, but we haven't shared that yet.

Okay, thank you.

No dramatic changes there.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Andrew Jeffrey with SunTrust. Please proceed with your question.

Hey, guys. Thanks for taking the question.

Sure.

Just taking a step back, you've performed really consistently relative to your guidance, and appreciate the clarity on regulatory, because I think that addresses just about every issue I've heard in the market, and that's all pretty favorable.

When you think about this business longer term and how early stage we are in terms of customer adoption and the fact that I assume a lot of the noise in the market maybe has forestalled faster adoption of the cards.

Are the growth rates you're currently experiencing in card activations and in revenue kind of consistent with how you view the business over the next several years? Or is there something we should think about in terms of the -- any change potentially in the trajectory, either up or down?

Well, I'll let John address the modeling question on growth. I think the simple answer is that we forecast based on what we know and what we expect firmly, because we don't ever want to miss guidance. We haven't done that, and we'd consider that a horrible failure if we did. So we forecast and make sure that we're doing what we know or what we feel confident in.

But we always reserve the right to accelerate new initiatives or to come up with a great idea or to do some other things, and we're always working on those behind the scenes, but they're not necessarily always in the forecast. So the growth rates we project are the growth rates we project, if that makes any sense, John, if you agree.

Well, yes, you know, if you look historically over the last ten years at Green Dot, there have been periods where our growth has come almost entirely from organic growth and same-store growth. Then there have been periods of accelerated growth when we've been rolling out new retailers or major new initiatives.

If you look over the past two years, roughly, we have not had a major new retailer or really major product change. So the growth rates you're seeing right now year-over-year are really driven by organic growth and same store sales growth.

Our expectation is there will be new initiatives in the future, significant product enhancements and other kind of step change growth opportunities. But I think what you're seeing right now is consistent with our long-term organic growth rate.

Okay. Based on the current distribution?

Yes, but you're right, exactly right. But like I said, something big happens, we'll let you know about it, and you can get excited about that if it would ever happen.

The other part of that -- I forgot, what was the other part of the question which I wanted to answer? It was about the growth. Andrew, help me out here. It was about the growth. You said once we get past this, once we get past all the noise about the industry.

I kind of liken this to sort of an S-curve. If you drive a car and you're stuck in traffic and you're going around all this traffic and all this, that once you break through to the straightaway, you tend to get back up to speed.

And you know, there's no question that our industry, because it has hit maybe critical mass, was beginning to hit critical mass at the early stages, has attracted the attention, appropriately, of just a tremendous number of newspaper writers and regulatory interests. And this is appropriate and part of a maturing of a really big idea.

But once we get past this and we're able to answer the questions and move to a steady state operating environment, which is what we were talking about earlier about the expenses in the quarter, it certainly seems like an opportunity where we can hit the gas maybe in a way that we couldn't previously. Is that a fair way to answer it?

Yes, that's very helpful, which is a good segue to my follow-up, which should just be around the pipeline for new distribution and whether now that some of the regulatory stuff seems to be getting cleared up, if you think you might have some -- I don't know if they're step change kind of announcements or relationships, but new distribution deals that you might be able to talk about that could give us some clarity or insight into how you might perform over the next several quarters, as opposed to the back half of '11 specifically.

Well, we're always working constantly on new initiatives that have impact. There's never been a time in our ten-year history that there isn't something on the horizon that we're excited about, but I can't -- I can't tell you what those might be or give you any specific guidance, unfortunately, for all the right reasons.

Okay. And then, well, one last one, if I may. John, you mentioned the relationship that exists between GDV and interchange and how that's changing vis-a-vis a higher ratio of direct deposit.

But is it reasonable to think -- you've had a couple of very strong GDV quarters, especially relative to the other card metrics, which I assume is a function of direct deposit increasing as a ratio.

Is there some way to think about the time period over which those money -- those funds get spent off the cards? Because at some point, I would think maybe with a lag, that catches up on a revenue per card basis, right?

Well, yes, but I don't want to -- the money is not pooling up on cards and it's all going to come off and spend and generate a lot of interchange. I mean, the money is coming off the cards. It's just when you have a direct deposit customer, more of it comes off in the form of ATM withdrawals, cash back at point of sale, more PIN debit transactions as a share of total purchase transactions from direct deposit customers, as compared to non-direct deposit customers.

So our revenue per card is continuing to grow, and direct deposit customers do have higher revenue per card. So I think you are seeing the impact of those direct deposit customers to some degree already.

But the GDV does not necessarily track closely to interchange revenue or even that closely to revenue in general. It's just the direct deposit customer has a different revenue yield or revenue as a percent of GDV than do non-direct deposit customers. Does that make sense?

Yes, it does. Thank you.

Okay.

Thank you. Our next question comes from the line of Chris Mammone with Deutsche Bank. Please proceed with your question.

Thanks, and thanks for all the detail. I got just a couple follow-ups on some topics already discussed. I think you mentioned in one of our inter-quarter appearances that you may have been close to signing a partnership with a top ten bank. I guess in the wake of the final rules and your comments on, you know, sort of the wind taken out of the sails there, does that affect that likely announcement?

I would say that inbound activity from those major banks has certainly slowed down quite a bit. There's nothing on the horizon -- I don't think I said there was anything on the horizon back then either, but we were certainly engaged in a number of discussions, and I think that the frequency of the discussions have died down. And after the release of the Durbin rules, there's been radio silence.

Now, to be fair, you can deduce from that what you want. Our sales team feels that there's just a lot less interest. I've heard that from others. But, I can't say that with precision.

Okay. And then last question on Durbin. Is there anything in there, and based on your interpretation that might change Wal-Mart's relationship with GE money as the issuer on a go-forward basis?

Well, nothing that I can comment on or that would be appropriate to comment on. But Green Dot, GE and Wal-Mart have been partners in this business going back to 2006, and we remain so. And to the extent that there ever would be changes, we'd all agree to them mutually and figure out what's right. But there's certainly nothing in the offing or in the planning stages at this point.

Okay. And then just on the, I guess on the treasury, have you heard anything new on that front? We had heard that, I think, they were contemplating putting out the pilot for the second year as opposed to full-fledged rollout next year. So it might be more like a 2013 timing for the full program. Is that consistent with what you've heard?

Well, it's probably consistent with what I've heard in terms of what could happen, but nothing in an official capacity. The official word on that program is that it's currently in review by the House Ways and Means Committee and by the US treasury, and they need to make a decision on together how they want to move forward, and that decision is on what scope and under what terms and how the product might look.

And all those things need to be worked out through that process. And I think until that process is finalized, we wouldn't have any official word one way or the other.

Okay. And then last question for me. Just relative to my expectations, it looked like churn was a bit higher than we were modeling. I don't think you called out anything on that front. Are there any call-outs on the churn rate in the quarter?

No. You know, we probably look at churn a little bit differently than a lot of the analysts do. I mean, we typically look at it on a cohort basis. I guess one thing that I can point to that's related to churn is we did share the first-time reloader number for the first time. We've given the year-over-year growth rates before. We haven't given the number. So you can see that our first-time reloaders as a share of new card activations increased year-over-year.

So we're continuing to see that more customers are reloading, and reloading customers make up a larger share of our active card portfolio. So those are good indicators of churn as we see it, and we continue to see improvement in those metrics.

All right. Very good. Thanks, guys.

Thanks, Chris.

Thank you. Our next question comes from the line of Gil Luria with Wedbush Securities. Please proceed with your question.

Afternoon. Thanks for taking my question.

Hi, Gil.

First of all, I've got a more tactical one on the acquisition of the bank, the potential acquisition of the bank. Is it correct for us to think of it as, well, if you get the bank, your margins will go up because you won't have to pay the issuer portion. You'll get to keep that.

And if you don't get the bank, you'll be able to roll off all the professional expenses that you had to incur during this process because you'll have certainty. So either way, certainty any time this year will help you bump up margins a little bit.

Yes, that's right. I mean, you know, one is sort of a save that's capped at a certain amount, and the other one is a save that would continue to grow with our business. We'd much prefer to get the save that comes with getting the bank charter. But you're right. Either way, at the end of this process, we will see some cost savings.

Yes, that's right. We don't -- but as John said we don't look at it that way. But your point is well taken more broadly, Gil, in that we're going through some very expensive times here at the Company.

For anyone who's ever gone through a bank holding company application, especially in this day and time, or who's gone through some of the change in growth that a company like ours is going through, we are spending a lot of money on those kinds of initiatives and still delivering the kind of growth and margin expansion, which is one of the reasons why John and I are always so optimistic about our company.

And forgive me for asking you to repeat, but I think you said that you expect all of your cards to be exempt for interchange based on the road map for the Wal-Mart product of allowing the first ATM transaction for free and then minor modifications, none of which you expect to have a material impact. Is that right?

Were you talking about all of your cards then? That by that point in 2012, you expect them to go forward as complying with what would require to be exempt from Durbin?

Yes. Well, we're exempt today, although by July 2012, under the rules, we'd have to provide the first ATM for free. And today, we do that at Wal-Mart through cash back at the POS, but that doesn't qualify to Durbin. So we need to have a fee-free ATM network.

The good news is we'd already planned to do that anyhow for Wal-Mart. So what I meant to say and what I think I did say in my prepared remarks was that as it happens, our product road map will also fulfill the requirement, more than fulfill it because all of our ATMs are free.

For example, once we do the network participating machines, it would more than fulfill that requirement. So we were going to do that either way. It just so happens that we lucked out and that also will qualify for Durbin.

The only footnote to that, Gil, is that we do have a relatively small portfolio of gift cards that would not be exempt, but all of our GPL cards will be exempt.

That's right. I'm talking about GPR, not gift.

And, finally, there was a very comprehensive discussion of American Express as a competitive product. So let me just add one aspect to that. They went into the market -- I mean, they've had products, but they went in with a tremendous amount of PR, publicity, advertising, etc., during the quarter.

Did you not see any impact in terms of eliminating card activations, pressure from your retailers? I would expect that with that amount of -- with that heavy of a launch, with that much PR there would be some impact during the quarter.

Well, I think that their PR campaign may have been aimed at analysts and investors. No, I'm just kidding. We certainly got a lot of questions about it, and there was a lot of curiosity from retailers as well, and we answered a lot of questions.

I think once people got comfortable with the nature of the product, that this is if, if you will, the Amex of prepaid cards, really designed for higher end usage for a new segment of customers, and they realize that the products really have very little in common with the Green Dot products, those questions went away.

So certainly, people are curious about it. There was a lot of PR, a lot of articles written, a lot of confusion, frankly, from consumer organizations who just assumed the card the was FDIC insured and assumed that the card was (issued) by a bank. And so, we've seen a lot of retractions and new articles come out. It's been a little distorted in that way. But no, of course, we had a lot of curiosity from everybody about it.

Thank you, very much.

You bet.

Mr. Streit, that is all the questions we have at this time. I would like to turn the floor back over to you for closing comments.

Great. Thank you, very much. We enjoyed the hour and giving you the presentation. We always enjoy the questions and are happy to take more. I know we have a lot of panels coming up going forward that hopefully we'll meet many of you at. We appreciate your participation, look forward to speaking with you again next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.