Green Dot Corp (GDOT) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Green Dot Corporation third-quarter 2012 earnings conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. The contents of this call are being recorded. I would now like to turn the conference over to Mr. Christopher Mammone, Vice President of Investor Relations for Green Dot. Please go ahead, sir.

Thank you and good afternoon, everyone. On today's call Steve Streit, our Chairman and Chief Executive Officer, and John Keatley, our Chief Financial Officer, will discuss 2012 third-quarter performance and updated thoughts regarding our 2012 outlook. Following their remarks we will open the call for questions. The slides that accompany this call and webcast can be found at ir.greendot.com, and will remain available after the call. Additional operational data have been provided in a supplemental table within our press release.

As a reminder today's call is being recorded and our comments include forward-looking statements, including statements about the loss of the TurboTax program to Green Dot and our expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the SEC, including the 2011 Form 10-K that we filed on February 29, 2012 and our most recent Form 10-Q filed on August 9, 2012, for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements.

Now during the call we will make reference to financial measures that do not conform to Generally Accepted Accounting Principles. This information may be calculated differently than similar non-GAAP data presented by other companies. Reconciliations of those non-GAAP financial measures to the most comparable GAAP measures are included as supplemental tables in today's earnings release and are also available at ir.greendot.com.

All statements made by Green Dot officers on this call are the property of the Green Dot Corporation and subject to copyright protection. Other than the replay noted in our press release, Green Dot has not authorized and disclaims responsibility for any recording, replay, or distribution of any transcription of this call.

Finally, just a couple guidelines for today's Q&A session. In an effort to get to everyone in queue we ask that you limit yourself to one question and one follow-up and then queue back in for any additional questions. Now I'd like to turn the call over to Steve Streit.

Thank you Chris, and welcome, everyone, to our Q3 earnings call. With me as always this afternoon is Green Dot's Chief Financial Officer, John Keatley.

Well, we're pleased to report that during the third quarter Green Dot had solid double digit growth in both revenue and active cards, the latter number net of the discontinued TurboTax program. Q3 saw new competition into the market with large national banks and major retailers, including some of our largest retail partners, providing consumers with greater choices than ever in the prepaid debit card category. Despite this, some of our best new card activation growth this quarter actually came from retailers where new competition was the most prevalent.

Additionally, Green Dot benefited from lower churn year-over-year and higher revenue per active card on a year-over-year basis while having among the lowest priced products on the market. Margins continued to see pressure as we invested heavily in marketing, new product development, new channels of distribution, and new technology that we believe is necessary to drive growth and efficiencies over the long term.

Some highlights to our Q3 results are as follows. Active cards grew to 4.4 million as of September 30th, representing year-over-year growth of 11% excluding the TurboTax program. One of the best measures of the underlying quality of our card portfolio is non-GAAP total operating revenues per active card. This metric was up 7% year-over-year in Q3. John will discuss our results with more granularity here in just a few minutes.

Next I'd like to provide some insight into what we believe are the top concerns of the market with respect to our Company. And those are, one, the possible threat to our ongoing sales posed by new competition in the market and in particular the new Bluebird product at Walmart. Two, possible price compression caused by that competition. And three, the impact of risk management policies on future new customer enrollment and other operating metrics.

So let me address each. First, I'll talk about competition. Around the mid-August time period, our largest selling pharmacy chain rolled out a number of competing products including an American Express product with no monthly fee. As a result of that new competition, Green Dot's facings were reduced materially on the rack in order to make room for those other new products.

It's only been around 10 weeks of this new selling environment, but we're pleased to say that thus far our brand has held up well with year-over-year new card activations up around 40%. As a point of comparison at this same retailer, those growth rates are similar or better than what we'd seen in previous years when we were exclusive.

As another data point, starting in Q1 of this year, our top selling convenience store chain rolled out many new competitive products on the rack next to the Green Dot brand. Plus those other competitors entered into a series of aggressive in-store promotions advertising things like fee rebates on their products and lower purchase prices than what the Green Dot brand sold for. Despite all that, the Green Dot brand continued to grow in that retailer with new card activations up around 5% to 10% year-over-year in Q3. This growth rate is slower than we had previously seen in that retailer when we were exclusive, so we're still growing in that retailer but at a slower rate.

Lastly, we'd like to give you a sense for what we're seeing so far at Walmart with the very aggressive launch of their new Bluebird product from American Express. The product has only been on sale there now for about two weeks, so this early data is hardly conclusive. But so far, our sales results are only slightly worse than sales in the same time period last year, less than 10% decline. So while not conclusive by any means, these early results are somewhat comforting.

To be clear, we're not satisfied with lower growth rates at Walmart or any retailer and we have many new growth initiatives that will need to be successfully executed in the coming months in order to reaccelerate growth rates over the long term. But our performance in Q3 further suggests that there is a large market opportunity for our products and that we can benefit from the mainstreaming of the prepaid category.

Green Dot has the largest customer base and the leading brand name in the prepaid category and we are a competitive force in the marketplace. While not conclusive, we believe these early results in the face of so much new competition from so many new, large entrants is a positive indicator.

As it relates to competition more thematically, I'd like to provide some context. There are 9,000 plus banks and credit unions in America including the well known top ten national banks. And all of these institutions do business. Just because Capital One rolls out a new rewards card with Jimmy Fallon and Alec Baldwin as their spokespeople, doesn't mean that people stop using or applying for a Chase credit card. And just because Chase advertises a Sapphire credit card with special rewards, doesn't mean that people stop applying for an American Express card. And just because Bank of America advertises free debit card rewards with their checking account doesn't mean that people stop opening checking accounts at Wells Fargo.

In other words, a theory that every new customer gained for one company must be a net customer loss for another company is simply not supported by facts in neither our industry or nearly any other consumer finance category that we're aware of. The prepaid category is large and we believe it is getting larger and more mainstream every day. We believe that opportunity for growth is available for many players in the prepaid space and we intend to work diligently to continue our long term leadership position.

Next, let's talk about potential price compression in the market caused by this new competition. We do believe that ongoing innovation in our industry combined with the more mainstream appeal of the product will result in lower pricing over time. In fact, Green Dot over the years has led the market with lower prices and is still among the lowest cost prepaid cards on the market.

On average, a Green Dot customer pays in total around $6 or $7 per month all in for our products. And this includes any and all fess of every kind including ATM fees and reload fees, monthly fees and new card purchase fees. This is considerably lower than almost any comparable checking account certainly and is at the lowest end of the prepaid market.

For example, while the American Express prepaid card sold at Walgreens and other pharmacies has no monthly fee, the customer will pay around $2.50 for the first ATM withdrawal and around $4.50 for each successive ATM withdrawal on a monthly basis. They'll also pay either $4 or $5 for cash reloads and $4 or $5 to buy the card initially.

Furthermore, the American Express card is not bank issued, not FDIC insured, and therefore cannot accept many types of commonly used direct deposits. So just doing two ATM withdrawals per month on that product would make the AMEX card more expensive than a Green Dot card based on similar usage patterns.

For Green Dot customers who qualify for our fee waiver, the cost of the AMEX card would be considerably higher than the Green Dot card. And of course, the merchant acceptance of American Express, especially at neighborhood based small merchants is fractional to that of Visa or MasterCard.

For other new products on the shelf, the fees speak for themselves. The NetSpend and PayPal cards for example are far more expensive compared to Green Dot. They have no free ATM networks and no fee waivers at all. For example, the PayPal card charges $4.95 for the purchase price, then charges another $4.95 36 hours after the purchase with an additional $4.95 per month after that. So we wouldn't expect to have any material pricing pressure from those entrants at all.

As it relates to the Chase Liquid product, we think this is an attractive offering and judging from the large mass media campaign supporting the Liquid card, it would appear Chase is sparing no expense to make it one of their most heavily advertised new product launches. In the case of Liquid the monthly fee is similar to Green Dot at $4.95. This is $1 cheaper than our Green Dot card, but about $2 more expensive than our Walmart Money card. However, many customers qualify for Green Dot's fee waiver plans and pay no monthly fee. Whereas the Chase Liquid card has no fee waiver unless you link it to another Chase checking account. We both have free in network ATM withdrawals and we both offer free direct deposit. However, Chase does allow free reloads at select specially equipped Chase ATM locations at their branches, whereas Green Dot offers reloads for between $3 and $4.95 at 60,000 plus retail locations.

However, we know from actual customer behavior and actual historical results that many prepaid customers do not wish to go to a bank branch and spend time meeting with a consultant and filling out forms in order to open an account. They would rather conduct their business where and when they shop. For that customer, we believe Green Dot will continue to be a far more convenient offering than the Chase Liquid card. As a point of fact, Green Dot's biggest growth years occurred during the free checking era when almost every large national retail bank offered a free checking account to all comers. So in summary, we think Chase has an attractive product with Liquid and we think they're doing a great job marketing it, and in the process, helping to grow the entire prepaid category. But it remains to be seen how that product may or may not impact Green Dot or the prepaid market in general.

In any event, Green Dot intends to take all appropriate steps necessary now and going forward to insure that we continue to be the best value brand name leader in the prepaid market while still delivering healthy margins and growth across our business.

Finally, I'll talk about the impact of risk controls. The phrase risk controls isn't representative of any one thing, but rather is inclusive of many types of monitoring, controls, policies and procedures that make up the ways in which we protect against enterprise risk at Green Dot Corporation and Green Dot Bank. As the leader in the market issuing far more accounts than any other prepaid company, we naturally tend to see emerging risk first. While risk controls may negatively impact new card activation metrics, we believe such controls may have the effect of positively impacting our overall active customer metrics. In fact, our new risk controls may be one of the reasons why we saw improvements in churn and revenue per card in Q3.

In any event, we certainly have no interest in growing new card activation and acquisition at the cost of sullying our portfolio or our reputation. On this topic lastly, controlling risk is not just a Green Dot thing, it's the right thing for all issuers and program managers of prepaid cards, and we believe that our thinking on this matter will ultimately be adopted by others in our industry.

Now let me close my section of today's call with some business updates for you. First, we're pleased to announce that CVS, 7/11 and the Pantry Stores, a large convenience chain, have all entered into new multiyear contract extensions with Green Dot. CVS Pharmacies and the Pantry Convenience Stores have been selling Green Dot products now for a full decade and 7/11 since 2009. We thank them all for their continued support and partnership.

Next, we're pleased to let you know that Walmart and Green Dot continue to work together to expand our Money Card category of prepaid cards in an effort to grow sales and revenue by bringing customers new and exciting offerings. Recent initiatives include a new line of NFL team branded money cards and a new Mossy Oak branded card. Mossy Oak is a popular affinity brand for hunters in many regions of the country. All these new products went on sale at participating Walmart stores just a few short weeks ago.

Walmart and Green Dot also continue to work closely together to bring new innovation to the market and to grow our mutual businesses for the long term. Since 2007, Walmart has been and continues to be an important and close partner for Green Dot and we greatly value that relationship.

Lastly, we're pleased to announced that Green Dot and the Florida Attorney General's office have resolved the previously announced prepaid card investigation into five leading prepaid companies including Green Dot. Green Dot has entered into an agreement of voluntary compliance known as an AVC under which we will make a charitable contribution to a Florida organization for $25,000 and will also reimburse the AG's office for certain expenses in the amount of $75,000. It's important to note that the investigation revealed no findings against Green Dot. Furthermore, the AVC officially acknowledges Green Dot's cooperation and support of the Attorney General's efforts to establish adequate industry standards for the benefit of consumers.

Now I'll have the call over to John Keatley who will take a deeper dive into our financials. John?

Thanks Steve. Our revenue growth in Q3 remained solid, particularly when normalizing results for the discontinued TurboTax program which impacted the year-over-year growth of many of our key metrics. The business continues to generate significant cash. Total cash and investment securities increased $50 million during the quarter. Our operating margins declined year-over-year and I'll share the drivers of that margin performance with you in just a moment.

But the first topic that I'd like to discuss is our revenue growth. As you can see on slide 3, our non-GAAP total operating revenues grew 14% year-over-year in Q3 or 19% excluding TurboTax. In terms of the three main categories of revenues, cash transfers grew the fastest, up 20% year-over-year, followed by interchange, up 16%, followed by card revenues, ahead by 8%. Normalizing for TurboTax, card revenue growth would have been 10%.

Slide 6 provides a breakdown of the main factors that drove the year-over-year margin decline. First, we had several promotional activities in Q3 designed to attract and retain higher quality customers. These included our new TV campaign which has been our best performing campaign to date and heavier online marketing which tends to yield a higher quality, longer retaining customer, but requires a larger upfront investment.

Secondly, new product development costs increased significantly in Q3 as we invested in products that we expect to deliver meaningful revenue starting in 2013.

Third, during Q3 we continued to invest in our infrastructure including the migration of a significant portion of our card issuing volume to Green Dot Bank which we expect will yield significant cost savings beginning in 2013.

Page 7 shows our non-GAAP net income, which came in at $12.8 million and our non-GAAP EPS, which was $0.29 per share on a fully diluted basis. In terms of our key operating metrics, we showed strong year-over-year growth. For the purposes of comparability, all of the following metrics have been normalized by excluding TurboTax. Our active card portfolio grew 11% year-over-year and new card activations increased 7% year-over-year. We saw an improvement in our churn rate of approximately 90 basis points which can be measured by calculating the proportion of cards that were active in Q2 but became inactive in Q3.

Our GDV grew 12% year-over-year and purchase volume was up a healthy 16% year-over-year. The strong growth in purchase volumes is another important indicator of the quality of the portfolio.

Cash transfers continued to grow rapidly in Q3, increasing 19% year-over-year driven by both increased reloads from our portfolio of cardholders and more reloads from our network partners' portfolios.

Our balance sheet continues to be very strong. We ended the quarter with $327 million of total cash and investment securities, including $164 million of unrestricted cash and cash equivalents, $149 million of investment securities, $13 million of restricted cash, and no debt. The portion of this cash that we consider to be unencumbered, essentially the cash and investment securities held at the holding company and not required to maintain regulatory capital ratios, was $225 million as of September 30th which equates to greater than $5 per diluted share.

We know that many investors may feel that we should use this cash to execute a share buyback. Not surprisingly, the use of cash is a topic that we carefully consider on an ongoing basis. At the present time, we believe that long term growth initiatives and the cash needed to support those initiatives is a more compelling use of cash in the near term. In our view, this is the right course given the growth related business opportunities we see ahead of us in 2013.

Our guidance for 2012 remains unchanged which includes expected non-GAAP total operating revenue growth of 10% to 12% , adjusted EBITDA of $104 million to $106 million, and non-GAAP EPS of $1.29 to $1.32 per share for the full year. We believe that this guidance remains reasonable given the uncertainty presented by the launch of new competitive products at Walmart and other stores and ongoing enhancements to our risk controls.

As we approach our Q4 reporting date, we expect to have better visibility into our future performance as we anticipate having more sufficient sales and usage data from our major retailers that have recently launched competitive products and as we prepare for the launch of new products of our own.

This concludes our prepared remarks. At this point we're ready to take your questions. Operator?

(Operator Instructions). Gil Luria, Wedbush Securities.

Good afternoon. Thanks for taking my question. In terms of the competition, you discussed a couple of good case studies. Can you give us an update in terms of your, apart from Walmart, your top five retail channel partners? How many of those already have a competing product on the shelf, have had it this quarter? Of the top five after Walmart?

Gil, it's three of the five have a competing product, so if you include Walmart, that would be one, that's not thru Q3, that just started as you know two weeks ago. We have Walgreens and 7/11. Rite-Aid is exclusive to Green Dot for a couple years to come and CVS announced they would be going nonexclusive, but is in the process of doing that this month. So it would be effectively in Q3, let's call it two of the top five. Walmart, if you add two weeks ago, three of the top five. And ultimately it will be four of the top five.

Got it. And then if you have a view of the rest of your retail distribution partners, what percentage of those would it be? Is that even meaningful?

Well the rest are already nonexclusive and have been really forever. Blackhawk has always sold multiple brands, a lot of our convenience store chains that are sold through resellers have always had multiple brands. So the answer is, most of the other ones would be nonexclusive but they always have been.

Got it. Thank you very much.

Ramsey El-Assal, Jefferies.

Yeah, given the significant competitive pressures in your retail channel, can you give us an update acknowledging the nice recent Sallie Mae win on your efforts to develop maybe more defensible channels like direct to consumer or even potentially pay card? Is your overall strategy or thinking changed there in terms of resource allocation or organizational changes or that type of thing?

It's a great question. If you look at the bulk of the money that we've put into new product development in Q3 and for that matter a lot of this year, it's been on new products that had nothing to do with prepaid and nothing to do with retail per se. In particular, our mobile checking account that we'll talk more about in the coming months. And also at the same time, making sure that we remain very, very strong in retail, some new products that are unique to Green Dot that we can sell to our retail channel. Different kinds of prepaid cards that have a unique advantage like the Rush Card or AARP or NASCAR for certain segments and certain affinities.

So it's important that we diversify both in terms of our customer segments like Sallie Mae and like those other products, and it's important that we find new products that give Green Dot something unique and special in the market. So that's been a real part of our investment this year.

Okay, thanks. As a follow up, there's been plenty of speculation and chatter lately, unsubstantiated admittedly, about Green Dot's options when it comes to being acquired or recapitalized or other options like that. Have you had any meaningful conversations with the board about those types of opportunities? And to what degree does your bank holding company status kind of limit your potential options of that type of thing?

Well I wouldn't want to comment on what we discuss in board meetings, but there's been no real discussion on it with anybody. And I think it's because the Company is still extremely profitable and still continues to grow. And aside from our stock price is still a healthy company. So I think for those reasons, there's not been really a lot of dialogue. I would characterize overwhelmingly the conversation in the building and among the senior management team is about new products, growing the company, controlling costs, and making sure that we are a winner in this evolution.

It's been, I'll tell you, it's been a fascinating period of time. We invented this industry back 12 years ago and now we're sort of faced with reinventing it again and we're excited by the challenge. So that's really what occupies the overwhelming majority of our thinking.

Okay, great. Thanks for your responses.

Tien-Tsin Huang, JPMorgan.

Hi, I hope you can hear me okay. I like the analogy with the issuers, but I'm curious, just a very basic question, Steve. Like why do you win in jump off situations? You talked about faring pretty well when you lost exclusivity. Is it packaging? Is it the retail network? Obviously pricing is one of the factors. Maybe if you could just go through some of that with us, that would be helpful.

Well I think there's a number of factors that all sort of add to the recipe. And I'll quote one of our major retail buyers who said, Steve, Green Dot is the Tide detergent of the detergent category. We have, remember, millions on installed customers, we've been doing this for years and years and years, over a decade. You have, literally, we get letters and calls from people whose mothers used our products and now their daughter is using our product. And people tend to be loyal to brands that deals with personal items like money.

So whether it's the kind of shampoo you use or the kind of dishwashing detergent you use, people change brands reluctantly, number one. Number two, we have a good product. It works. It's simple, it's basic, the fees and well disclosed, people know how it works. And they use it. And I think that people underestimate how hard it is to kill a network model and how hard it is to start a network model. And so in that regard, we have time and brand reputation and the user base on our side.

Having said that, we never take that for granted. We wake up in the morning paranoid and go to bed even more paranoid because we believe that if you're not paranoid it's a recipe for disaster. So I don't ever want to appear in any way cocky and I want to point out, Tien-Tsin, as we said in the prepared remarks that the results that we've had so far are very early. Ten weeks out of Walgreens and two weeks out of Walmart does not a sales track record make. So we have a lot of evolution to come and it may be that we're impacted more severely going forward. We just don't know. Only time can answer that question.

But I do think we have a strong brand a, a strong consumer preference and I think that's why you see us generally, still even in these competitive negotiations, getting the lion's share of the retail position or the retail rack, the eye level space.

Great. That's helpful. Maybe just to dig in on the Walmart Bluebird, obviously a lot of attention there. But I was trying -- I've tried it, I've seen it in the store, and I'm trying to think about the experience versus a Money Card. So I guess the key difference in my mind was the mix of money center sales versus in lane sales and also check cashing as a source of funding into the Money Card. Which I think is a little bit different with Money Card versus what Bluebird can do. So can you quickly go through how that might defend sort of your share in activations as we go through this fourth quarter versus Bluebird? Or am I way off base in thinking about those differences?

No, I think it's good to think about them. I mean, look, the way that we think of it here at Green Dot, and we have a huge amount of respect for Walmart, Bluebird is a highly innovative product. And I think that Walmart and American Express have come up with something unique and interesting and compelling for consumers that attracts or is designed to attract a different demographic of people who currently have a Chase account or a Bank of America account of a US Bank account or whatever it might be. While the Money Card is marketed and attempting to attract the consumer that maybe today does not have a bank account or is a cash customer or is looking for something faster and easier.

I think they're both good products. I think the Money Card product will get better over time. I think the Bluebird product will get better over time. And I think it's innovative. We hope it does fabulously well at Walmart and we hope that the Walmart Financial Services team has another hit on their hands. So we don't look at it as an us versus them, we look at it as a fabulous innovation and we look at Walmart as at retailer that we expect to work hard to make sure that we continue to grow.

Okay, great. I won't hog the call. Thank you.

Bob Napoli, William Blair.

Thank you. I guess just to follow up on Walmart, you said two weeks in, Steve, and you're down 10% on sales at Walmart stores. And is that - are they in all Walmart stores? And how can we track that?

What we said is our sales have not been down materially, less than 10%. I do believe Bluebird is in all stores to my knowledge. There may be a few -- as retail works, even out of the best intentions I think things don't always happen as you'd like overnight. But I would have to assume by now that Bluebird is in most all Walmart stores. But to be fair, that's a better question for the Walmart team. So I think it's fully rolled out.

But again, and this is why we're cautious about this or maybe cautiously optimistic, but I can't say it enough, that two weeks does not a trend make. But we knew that we'd be bombarded with questions about it, so we wanted to provide whatever information we could at such a short time into the new program.

But AMEX is spending a lot of money on marketing. If you watch prime time TV or check your Twitter feed or Facebook, you'll see that. So they're taking this seriously. Walmart is a fabulous retailer and they have tremendous merchandising for the product in the store. If you've gone into a neighborhood Walmart, you'll see the big what do you call it -- the pallets and the attractive displays. They've done a fabulous job. So we're not saying that our results two weeks in are indicative of anything but that, but I do believe they're fully rolled out.

Do you have any plans to make pricing changes in Walmart or otherwise? With Bluebird in the Walmart locations, does that change the terms of your contract? Like your commission rate, I'd be going back to Walmart and saying, I really think we should raise the commission rate next year given that you now have this Bluebird product.

The answer is no. Having Walmart launching Bluebird doesn't impact the amount of money we pay to Walmart as a commission rate, if that's the question. In terms of do we plan to do anything with pricing, the word plan implies something happening imminently or something in the works or something, and that would not be the case. I think it's fair to say though that we're always open minded to anything that gives us a competitive advantage and that makes sure that we are a long term survivable player, surviving player. So I would never say we wouldn't change pricing or anything like that, but to answer your question directly, there are no immediate plans.

Thank you. And just a comment. Given that this is such a huge part of your business, Steve, I think it would be helpful if partway through the quarter you kind of gave an update on how you're doing at Walmart as opposed to just -- I think it would be helpful given that it's such a huge part of your business with Bluebird ramping out, if at the end of November you maybe came out with statistics for the month of November in Walmart year-over-year.

I appreciate the comment. Can't say that's something we'd do or not, and John reaffirmed our 2012 guidance, so it kind of is what it is. But it's something I appreciate your comment on and that we'll take into advice.

Thank you.

Greg Smith, Sterne Agee.

Hi, guys. Steve, it sounds like you don't want to talk much about the mobile checking product, but it just strikes me that the Bluebird card feels very much like that to some extent. Is that off base I guess would be my first question.

Well I don't know if it's off base. I think when our product comes out you can decide. To the extent they're both targeted to people who have bank accounts currently, I suppose it has that in common. But AMEX competes today on the credit card side with dozens of major issuers and AMEX and Visa and MasterCard and Discover all compete for their share of credit cards. So I don't think, Greg, that it's a one or the other, but to the extent they're both going to be appealing to people who have checking accounts at traditional retail banks, they certainly would have that in common.

Okay, and then will it be sold at Walmart? I guess I'll just ask that flat out.

Don't know and at this point couldn't comment even if I knew.

Okay. Thank you.

George Malose, Credit Suisse.

Hey, guys. Just taking a look at the guidance that you guys put out there on the revenue side, it would suggest that in absolute terms revenue would come down in the fourth quarter from the third quarter. Historically you guys have had a ramp up there. Maybe you can kind of comment on some of the conservatism around there, how you guys came about that guidance?

Yeah, thanks for the question, George. Yeah, in Q4 we continue to have a strong dose of conservatism in our guidance really for the same reasons we adjusted guidance down last quarter. There's still uncertainty around the impact of competition on our sales at our major retailers. As Steve mentioned, we only have two weeks of sales data with Bluebird at Walmart, so we don't yet know what the full impact of that will be. And there's continued uncertainty around risk controls. That's had an impact on our business to date and we expect there will be some continued enhancements to our risk controls going forward. So in light of those uncertainties, we thought it was prudent to leave our guidance unchanged for the last quarter of the year.

Okay, and then last question for me, you guys mentioned the churn improving in this quarter. Do you think that's something sustainable or is it just sort of too early for you guys to tell?

Well, you know, we hope so. And we don't think it's purely random either. Our advertising, our marketing efforts, our pricing and our features are really all designed to try to retain and keep customers for a longer period of time. I think part of it is a feature of the fact that a year ago we did have more of the tax refund volume, so customers were getting cards and late filing. They were filing tax returns in September and the first half of October. And a lot of those customers were short-lived. So I think part of the improvement is a feature of that. But it's also a symptom of the fact that we have more customers enrolled in direct deposit and we're focused on keeping customers for a longer time.

Great. Thanks, guys.

Mike Grondahl, Piper Jaffray.

Thanks for taking my question. Could you just help us understand the heavy investment that you're doing right now? And how long do you think that really lasts? And I guess I'm talking about slide 6 the most, going from a 25%, 26% margin to 18%.

Sure. You point out that we have heavy investments. You're absolutely right, this was a big investment year. Some of those investments include acquiring Loopt which is really an integral part of our new product development strategy. We're working on building new products for Sallie Mae and we're working on creating a retail version of the Rush Card. We're building a new checking account that we believe will target a new demographic and pull new people into the category. And we're working on rolling out Green Dot Bank and this month we'll be migrating a large portion of our issuing volume from Synovous Bank into Green Dot Bank. Those are all initiatives that require significant investments and you really don't see the financial impact of those investments until next year.

We also had some significant marketing initiatives this year. We have a new TV ad campaign in the market. So far it's our best performing TV ad to date. We've spent more on online and we found that we attract a higher quality customer on average online. And that was a source of significant spend this year as well. So really a quarter of significant investments that should pay off in the quarters ahead.

John, let me just ask it this way. What do you think those total investment dollars in '12 are and what do you think they'll be in '13?

There's a slide in the presentation that kind of gives you a walk through of what those investments were in the quarter. So you can back into it that way. Those dollars are significant. We're not ready to talk about new initiatives or new investments in 2013. In Q4 we should be able to provide some additional direction there. But it was a significant investment year for us and next year we should see the fruits of those investments.

Okay, thank you.

Julio Quinteros, Goldman Sachs.

Great. Hey, guys. Maybe just coming back to the integration efforts, especially on the back of the acquisitions, I'd like to hear just a little more in terms of where you are on the integration efforts and then ultimately what the thought process is around the product roll outs? I think one of the efforts you talked about on the mobile might obviously be tied to the Loopt piece, but would love to hear more on the bank side as well. If we can just kind of get some sense there, that would be helpful.

Sure. These are monster initiatives. It's easy to say it I guess and harder to do it. Because when you're dealing for example with the bank, you buy the bank and then remember, it's a real bank. It has a branch with lollipops for the kids and drive thru tellers. So you're running a branch in Provo, Utah and servicing that community while taking a community bank and turning it into a platform that can safely and soundly serve as the issuing platform for millions and millions of accounts nationwide.

So the technology and the capital reserves and the staffing and all that, new packaging that has to have new terms and conditions and new labeling for Green Dot Bank, and these things are all very significant. And they occupied in the quarter I'll bet at least 100 employees, full time jobs out of our technology division and our bank division and risk and governance divisions, to pull off. So these are fairly major chunks of meat that you have to digest. Once you do it, you do it, but in the early days it's no small effort.

On the Loopt side, that integration has gone well and as expected. We have a lot of Loopt talent who are now managing broader parts of the Green Dot technology team and Sam Altman, who was Loopt's CEO, is a great partner and has become a great friend. And the strategies that we're putting into our mobile products we think are spectacular and hopefully will really wow consumers going forward. But all these things take a lot of time and meetings and money and effort and discussion and none of them are easy, but I think we've done a fairly good job of it and we'll see how that goes over time.

Okay, and then just in terms of the product rollout around some of these efforts, would that still be something sort of first half I guess of 2013? How should we think about that part?

Yeah, for sure. The mobile stuff, we're targeting Q1 for some of the launches and certainly by second half full launches. And having said that, any time you have new, virgin technology, and that's what the mobile stuff is for us, we test it and test it and test it again. And pay people to break it and then test it again. So we're feeling very good about it, but we could miss by a month here or there for reasons of caution I guess or safety, conservatism. But we think that's right.

The Rush product is on track for Q1 development and a Q2 rollout. Sallie Mae will be rolled out in Q1 in a limited fashion and then of course the big enrollment for school is in September, so you'll see more of that. But I think we're on track with all of that. But when you put all that together, remember most companies, if you think of other companies in our space or other companies in banking, rolling out one, just one new iterative product in a year could be a two or three or four-year effort if they do just one. And Green Dot is chewing off three, four, five major initiatives in a year and succeeding at it. But it would be wrong of me to say that it's been easy. It has not been easy. We're getting through it, but it's a lot.

Got it. And Steve, just one last one. I mean you went out of your way to give us the impact on pricing and competition and you did a nice job of laying out the issues that you're facing as far as threats by new competition. And I guess maybe just what I'm trying to gauge is, based on what you've seen, based on what you understand about the competitive dynamics, do you guys feel better at this point? Or is it still too early to know what all these trends ultimately mean?

Well you know me well enough that I never feel good about anything. I would say that we feel good that we have a good path to execute to make sure that Green Dot is a big, viable player in banking for this part of America. So we feel good about that. But it's just too early to tell what Bluebird means to our sales, too early to tell what JPMorgan's Liquid card does, not just to our sales, frankly, but the entire industry. This isn't about Green Dot, that's just an industry play. And we don't know.

So we watch them carefully, we look at them. Like you, I see the commercials on TV every night alongside our commercials and so we don't know. But by nature I'm optimistic. I'm an entrepreneur and our staff is optimistic because we've worked all together for years. But these are clearly uncertain times and evolutionary times for our industry and that's why I think you're seeing us be so cautious as we guide investors and the way we write our prepared remarks and answer these questions. Because if we knew beyond a reasonable doubt, we'd tell you that. But I've been in retail and in marketing and in sales for a long time, and the answer is that in some ways the jury is still out. So we're optimistic, we're comforted by some of the early polls, let's say, to use an election season analogy, but the election hasn't been held yet. So we need to be cautious and continue to be conservative in the way we forecast.

Great. Thanks, guys. Good luck.

John Kraft, D.A. Davidson.

Hi, Steve, John and Chris. I just wanted to drill down into the risk controls a bit. It seems like indirectly at least they're helping you in some areas like churn. Can you quantify though how much they're impacting you on the actual activations?

Well we can't give you exact percentages and we're not always sure day to day, so you sort of look at it globally. But I think the answer is, in some channels a lot. Look, we did a -- let me think how to say this. We a few years back, as everybody knows, did the TurboTax program which we thought at the time was a blessing. I'll tell you what it was though for use and that was a crash course education in all the crazy things that happen with tax fraud and with ID theft and everything else. And it's something that we're still cleaning up from. But you can't unring the bell. In other words, if you're running a bank and you're a CEO like I am who really, really cares about reputational risk and a clean portfolio and a long term survivable, sustainable public company, we take that kind of stuff real seriously.

So the more we learn, the more we learn. So you install some new programs that track Internet IP addresses and you go, holy cow, look what we learned here. And then we buy Loopt and we learned that through G-location we find out there's other crazy stuff happening somewhere else. You block that down and then you run some other reports. And if you're working in Green Dot risk management and if you're our Chief Risk Officer, it's kind of a fun time of renaissance, of knowledge and technology. But we are really serious about making sure that our customer base is legitimate and pure and good. And we think that's the right path to take.

So the answer is, if you think of the tax channel and tax refunds, we cut out a ton of activations. I mean many, many, many thousands.

Yeah, on that topic, one metric we can offer is that we're now declining over 10% of new card activation attempts which is a significant increase in part due to these new controls that Steve's been discussing.

If you look at other channels, they seem not to be as impacted. So we're sort of learning which parts of our portfolio are more prone to be targeted by fraudsters. So it's hard to say, but we would expect the decline rate will go up depending on the kind of customer it is.

But the customers that are left behind are more likely to be real, legitimate, ongoing reloading customers. b And look, even if that isn't the case, it is what it is. You can't run a company by keeping your head in the sand and pretending not to learn things. And so we really have a goal to be an extraordinarily fine bank holding company and bank and provider of products for years to come. And controlling your enterprise risk is a part of that.

Gotcha. That's helpful. And Steve, you did mention Intuit, so I'd just like to ask, the resigning of that TurboTax deal, did that just come down to price?

Well I don't know what it came down to. We're not doing the program and I don't know that it's been announced who got the program. Oh, it was announced? Okay. Sorry, I didn't know that. So the answer is that you'd have to ask Intuit about that. But Intuit is a fine company and whoever ends up doing it I'm sure is a fine company, but we're not doing it and it is what it is.

Great. Thanks, guys.

John Rowan, Sidoti & Company.

Good afternoon, guys. I just wanted to clarify one quick thing. Sorry, I'm on the east coast, so I'm not getting great phone reception. Steve, when you talked about Walmart you did say that there was a 10% reduction the first two weeks year-over-year. Does that have anything to do with the increased risk protocols?

Probably. It's hard to say what was the cause of risk controls versus what's the cause of Bluebird versus what's the cause of bad weather. It's just hard to know for sure. Or inventory controls. So that's why we're saying it's not really -- anything in that 10% zone up or minus, we've had some days by the way we've been up here or there. So you just don't know. It's just too soon. So the answer is, risk controls in general have clearly impacted sales, certainly during tax season, of Walmart for use. Walmart, like us, is very, very thoughtful and conservative about controlling risk and reputation, so we work together on that. And if you lose a customer, it is what it is. But it's hard to say exactly what the cause is, but the results are what they are.

Okay, thank you.

Ashwin Shirvaikar, Citi.

Thanks. I wanted to -- Steve, you mentioned in your remarks I believe, that pricing in the industry over time goes down. Clearly pricing has many facets, initial price, reload, monthly fees, so on and so forth. Could you provide more granularity on what you meant? And then take it to -- when you speak of pricing at Walmart, is it basically your decision? How much of it is Walmart input? Is it out of your hands? Can you talk about that?

Well when I speak about pricing broadly, it's everything put together. The consumer, when they think of the price of a product, I don't know that they're always thinking of this fee versus that fee versus the other fee. They're referring really emotionally to what they believe they're paying for the product.

And so I don't know that I have any one fee in mind so much as I'm thinking just in general how the consumer thinks about fees for the prepaid category. So if you were to project out some years down the road, I think that the surviving large and leading players in the industry will have extraordinarily highly functional products that do lots of cool things, that cost less then generally what they cost today. How that comes out in terms of this fee versus that, I don't think any of us can predict with certainty today.

As relates to Walmart, the Walmart Money Card is the Walmart product. It's a Walmart product, we're their service provider and their partner in it. So on one hand, we would discuss pricing together as collaborative partners. On the other hand, at the end of the day, it's Walmart's product and we would do what they wanted to do.

Okay, and on prices, just to drill down a little bit more on the pricing comment, in terms of if the surviving players can do it more cheaply, say five years from now than today, is that because they're taking a lower margin or is it because you've got more scale and you're passing on the benefits to the consumer? What are the drivers and the pieces of that?

It could be all that really. I can tell you what our preferred outcome will be and then we can go from there. Historically our size and scale has been a real competitive advantage. And the investments we've made in platform plays have been recent, say in the last year including the bank and so forth and Loopt, and we'll have to see how those contribute. So we could look really smart or really dumb a year from now. So we'll have to wait.

But clearly we believe that size and scale is a great hedge against pricing. And also longer retention and higher quality customers versus one and done customers. All those things add into a value proposition that hopefully increases for the customer over time while still providing margins that are acceptable to the company and to the market.

Okay, I just wanted to get those points out there. In terms of contribution from Sallie Mae, if you could -- what's your thought process there? I know you mentioned the September timeframe with schools, but anything else other than that seasonality aspect?

No. We could say that we and Sallie Mae both believe that we can penetrate a large portion of Sallie Mae's universities that are on their disbursement program. So in the first half of the year, the program will be fairly small, but we expect and we're working hard towards a significant penetration of their school base in 2013 to 2014 school year.

John Welch, Brouchou.

Thank you, Steve, John, and Chris. First off, thank you for being very straightforward and refreshing on this call. The mobile first quarter launch was answered. I'd just like to drill down. The Bluebird AMEX card is a Walmart product, also, correct?

Yes.

So the pricing is being driven by Walmart?

I see what you're saying. Well I don't know, I couldn't tell you how the contract is written or who decides what or how, but certainly the Bluebird brand name, my understanding, is something unique to Walmart. And the product itself, the sort of platform that Bluebird is run off of would be similar to I think they're using the same platform for the AMEX prepaid card that they sell at Walgreens and CVS and so forth. But I don't know --

Right. It's the same platform, to the best of your knowledge, that's the same platform that they launched 6 or 7 months earlier that they closed down at Walmart, correct? They didn't change the platform?

I don't mean to be not direct on it, but those are the kinds of questions I think best left for Walmart on their call or AMEX. Because I'm not privy to those conversations and would hate to opine.

But generally there was a launch and it was a failure and now there's a re-launch and the work we did, and I don't want to sound like Colombo, but there seems to be a great deal of focus on this, on the Bluebird launch. And the Visa card is out some 8 million holders and I believe the AMEX is at 5 million. And so you've got about a 3 million difference there. And if you drill into that demographic, the point I'm getting to is the size and scale you speak about, shouldn't you also talk about location? Because if you drill down into the demographic of the Walmart customer, they're not shopping at the majority of the places that take the American Express card. They're shopping at the Dollar Trees, the Dollar Generals, Dunkin Donuts, the liquor stores, the local grocers. And if you do some basic due diligence and call these customers and these retailers, they're not accepting the AMEX cards. So the heavy investment that AMEX is spending, I start to scratch my head because they're not in the location of the demographic.

Yeah. Well, it's hard. Look, it's hard for me to comment on it. I'll say this to be fair to the AMEX Bluebird product. They're really marketing it as an account, and oh by the way, there's a card. In other words, it's an account that they're looking to market as a substitute for a checking account or an alternative to a debit card. So much of what you say may be true, but I think only time will tell how consumers adopt it and so hard for me to say. But I appreciate your thoughts and your points.

Look forward to seeing the mobile launch first quarter.

Thank you. Appreciate it.

Bryan Keane, Deutsche Bank.

Hi, guys. I jumped on a little bit late, but the Walmart two weeks that you're measuring, what weeks were those? Was that starting from the October 8th launch of Bluebird?

I think it launched the 15th or 16th, so it would have been the 16th thru yesterday effectively.

Yeah, it was really the last two weeks of October starting with when we believe the product was fully rolled out.

And then how much -- I guess how much did the last couple days, due to Hurricane Sandy, probably had an impact? Or was it not -- didn't have any material difference?

Yeah. No, Hurricane Sandy did have an impact for sure.

Everywhere though, not just Walmart. Remember that a lot of it -- if you look at the population of the United States and where a lot of our retail is at, Walgreens and CVS, so Green Dot retail, not just Walmart, were shut down for a couple of days, no question about it. Or a good portion of those chains.

So it sounds like it's down 10% in revenue over that two-week period. What was it pre the launch of Bluebird? What was Walmart running?

Well just to be clear, Bryan, it wasn't revenue, we don't know what the revenue will be because that depends on lifetime behavior We're just saying unit sales. So unit sales are down, our actual card activations were down less than 10% compared to the same period last year. That's the only indicator we have. In terms of revenue and retention and all those other, GDV and all those other metrics, that will take some months to figure out.

Okay, and what's that same metric card activations, unit sales before the launch of Bluebird this year?

It actually was down more than that. That really is more of a feature of the spike in volume we had of late tax filers last year leading up to the October 15th deadline. So there's always a lot of factors impacting sales at any one point in time and for the first half of October we were actually down even more than that because of sort of a feature of the tax volume we'd seen the year before.

And then the risk controls and all that stuff.

Yeah, you have the risk controls and you have Sandy and you do have a lot of -- so we're not intending to say that the impact of zero to 10% is conclusive and entirely attributable to Bluebird. It's really too early to sort of make that sort of final determination.

It's tough. We know that everybody wants to somehow try and triangulate an answer and if we could do it for you we would. But if you look at just the weeks leading up to the launch of Bluebird, as John said, our sales were down more, so that would mean that Bluebird increased our sales. But that's not the case. Its just that you have risk controls that attack tax fraud more than out of tax season and all that kind of stuff. So that's why the best comparison is to give you a year-over-year same time period comparison because the seasonality is less of a factor when you do it that way. But we'll know in six months, right?

Yeah, that's helpful. And then just finally, John, the margins for fourth quarter, if I back into them, it looks like margins will drop again in the fourth quarter. Is that additional investments or how do we think about that drop in operating margin?

Well the Q4 guidance which I mentioned before is conservative in light of the uncertainty we have around competition and the impact of risk controls. So really what you're seeing is, assuming that the revenue comes in in line with that guidance, a lot of that revenue decline would flow to the bottom line which would result in a lower margin. So that's really the driver of it.

Okay, very helpful. Thanks so much.

I think, Operator, we're done.

Yes, Sir. We thank you and the rest of management for your time and we thank you all for joining today's conference. It appears that the conference has ended, so at this time you may disconnect your lines. Thank you and take care, everyone.