Green Dot Corp (GDOT) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Green Dot Corporation's second quarter 2013 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. The contents of this call are being recorded. I would now like to turn the conference call 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 2013 second quarter performance and updated thoughts regarding our 2013 outlook. Following their remarks, we will open the call for questions. 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, our comments include forward-looking statements, including statements about our GoBank product, the future impact of competition and new more stringent risk controls, the results of our business development pipeline, 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 Securities and Exchange Commission, including the Q-1 Form 10-Q we filed on May 9, 2013, for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements.

During the call, we will make reference to 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 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.

Okay. Thank you, Chris, and welcome, everyone, to our Q2 call. With me today is John Keatley, who, as you know, will be leaving us in September to move to Sweden. And so this will be his final earnings call at Green Dot. And so thank you, John, for being by my side for the better part of the last decade.

So there's a large amount of important information to share today, so please stay with us throughout the entire call so you can hear the full content. In addition to discussing our financial results for Q2, we'll also share some information on the first few weeks post-lunch of our GoBank mobile bank account product, and we'll discuss some of the implications of the proposed transfer of the Walmart MoneyCard portfolio from GE Consumer Retail Bank to our own Green Dot Bank, which was announced previously and is still subject to regulatory approval. Today we are also announcing a significant expansion of distribution for our Green Dot family of prepaid products, as well as a new major initiative called Project Outreach, whereby Green Dot bank products will be offered directly to consumers for the first time ever through community-based financial service centers, also known as check cashing stores. For that conversation, we have included a few supporting slides as part of today's earning deck and presentation that is available at ir.greendot.com.

Okay. So first, let's begin with our financial results. In Q2, Green Dot continued to fare better than our internal forecast, posting $143 million in non-GAAP revenue, representing year-over-year growth of 4%. Adjusted EBITDA was $30 million, growing 10% over Q2 of last year; and our EBITDA margins expanded as well, up to nearly 21%, a 120 basis point improvement over the same period last year. I want to remind you that we achieved this margin expansion despite the approximately 4 percentage point higher commission rate we started paying to Walmart on May 1. We also generated $63 million in cash flow from operations this quarter, more than double what we generated during the same period last year.

We are really pleased with his performance, because as you know, the year-over-year headwinds we experienced were unprecedented in our business. As an example, the risk controls we have in effect have either blocked an account or denied access to an account for approximately 1.8 million customers since this time last year. The painful part is that risk modeling by its nature is not precise, meaning that we often shut down legitimate customers along with illegitimate customers. But that's just how it goes. In any event, these are people who chose Green Dot on the rack, funded the card with an initial deposit, and then were not allowed to open the account; or if they had an account opened, were blocked from using it further, due to failing one of our risk controls. To put that in perspective, that number, the 1.8 million number, is higher than what we believe most of our competitors acquired in total during the same period. Yet despite this headwind, plus pressure from many new competitors, we still grew our financial performance year-over-year while maintaining our industry-leading active card base of 4.4 million, including nearly 3 million reloading customers, we believe the highest reloading customer base in the prepaid industry.

We also grew many of the key usage metrics that drive our business, evidence that the overall quality of our portfolio continues to improve. Enrollment in direct deposit increased for the 32nd quarter in a row, posting a gain of 11% year-over-year. The number of cash transfers also showed strong double-digit growth, up 12% year-over-year. Average spend per active account grew by 12%, and average revenue per active account grew by 5%, continuing the healthy trend for that metric. The positive usage and retention metrics were similar at both Walmart and non-Walmart retailers. Hard to know for sure if we've bottomed out, so to speak, on the effects of risk controls and competition, from Bluebird and the many others; but we feel like we now have some better visibility into our business than we've had in previous quarters.

Based on the strength of our results through the first half, we are also modestly raising guidance for the full-year. So stay tuned for John Keatley's report in just a few minutes for those details and more color on our financial performance in the quarter.

We'd now like to bring you up-to-date on GoBank, the mobile bank account from Green Dot Bank. GoBank was released to the general public over the July 4 holiday to great praise and strong reviews from technology press, consumer press and social media channels. As you can imagine, it's far too soon to have any specific indication of how we might expect GoBank to perform over time, but we know there's a tremendous amount of curiosity and interest surrounding GoBank, so we'll share some early tidbits that we think you may find directionally interesting. So first, we know that our GoBank customer base is certainly active on social media. We have a good number of followers on Facebook and Twitter, and we've been fortunate to receive very strong consumer and tech reviews on the product through social media.

In terms of customer behavior, the actual usage patterns so far are equal to or better than what we modeled prior to launch, with direct deposit rates and early indicators of retention and customer commitment looking really good thus far. Of course, the question that everyone asks is, will people actually choose to tip us and pay us a voluntary monthly membership fee, because we have the pay-when-you-want feature on the bank account. And so far, the answer is, for a lot of people, yes, they will. Because we view this pricing information as commercially sensitive, we won't be sharing the details. But suffice it to say it's consistent with our internal models thus far. And the percentage of customers choosing to pay us and the amount of what they pay us has evolved in a positive direction over the past three weeks since we've launched. But it's hard to tell how this will play out over the long-term; it's just too soon. So we are off to a good start with GoBank. But again, to be clear, these are very early days and we really won't have a good read on the product's performance data, revenue or profit contribution for some months to come. But we promise we'll keep you updated from quarter to quarter, as we continue to learn more.

On the GoBank marketing front, our footprint continues to expand, with the following new developments. First GoBank is currently a featured app in the Apple App Store in the Finance section, under New and Noteworthy. GoBank will now be marketed in Barnes & Noble college bookstores. These stores serve 555 university campuses, representing some of our country's largest schools and reaching more than 5 million students. Separately, we are also pleased to announce that GoBank will be featured on the campus of UCLA in a number of locations, including their main college bookstore in Ackerman Union. One of the reasons we've aligned our GoBank marketing strategy with the higher education channel is we believe GoBank is truly the perfect bank account for a college student. It's super easy to get from the app stores, it's very inexpensive, and there are no ways for the student to get into trouble. No overdraft fees ever, lots of free ATMs all around them. And like the students themselves, GoBank is all mobile, all the time.

Next, our partnership with major mobile carriers expanded as well, as we welcomed US Cellular. US Cellular has nearly 5 million subscribers, and GoBank will be promoted across their Android device portfolio and in other strategic marketing collaborations. We continue to leverage our existing retailer footprint, having recently signed an agreement with 7-Eleven, so that GoBank customers can add cash to their accounts at all of 7-Eleven's US locations, beginning later this year. And on July 18, about a week and a half ago, we began our sponsorship of Project Runway at Lifetime; and hopefully, you've been able to tune in for that. And lastly, we're pleased to announce that champion surfer Bethany Hamilton is our first GoBank spokesperson. If you have teenage daughters, you no doubt took them to see the hit movie Soul Surfer, which is Bethany Hamilton's life story. She's the teen surfer who lost her arm in a shark attack while surfing, and yet came back to be a champion again. She will be sharing her GoBank experience online and through social media channels, and we're proud to have her as a representative of our GoBank brand.

Now let's discuss the proposed transfer of the Walmart MoneyCard portfolio from GE Consumer Retail Bank to our own Green Dot Bank, which is subject to regulatory approval. If approved, we believe this is a significant and positive event for Green Dot on a number of levels. First, it allows us to become a more integrated partner with Walmart, in an effort to bring its customers best-of-breed financial products and solutions. Second, by Green Dot Bank becoming the issuing bank and deposit holder for the Walmart MoneyCard portfolio, we expect to mitigate a key business and regulatory risk of relying on a third-party non-affiliated bank to provide these foundational services for the program. And lastly, there are also positive financial efficiencies that we would expect to achieve post-transfer, if approved.

Now, let's talk about Green Dot prepaid cards. Today I'm pleased to announce a significant expansion in distribution for our Green Dot family of prepaid cards. First, Green Dot products are now selling in Dollar General and, as previously announced, will soon be selling in Dollar Tree. Our products are also now selling, or will soon be selling, in The Home Depot, Kroger convenience stores, and Save-A-Lot retail stores. All told, this represents approximately 20,000 new major brand retail stores selling our products.

We also today have an exciting announcement to make regarding a new initiative called Project Outreach. Project Outreach is the result of a tremendous amount of effort on the part of Green Dot Corporation and Green Dot Bank to directly reach America's inner-city neighborhoods with bank-issued, FDIC-insured, low-cost prepaid debit cards and other types of bank accounts. We believe Americans living in the country's inner cities desperately need safe, regulated bank accounts that inexpensively satisfy the core banking needs that everyone requires to conduct their daily life. While Green Dot products have been available, as you know, for many years in our country's largest mainstream retailers, these retailers generally do not have a high concentration of locations in the inner-city. So despite Green Dot's size and notoriety in the prepaid industry, our products have generally not been as available for acquisition and reloading in the heart of where many potentially high quality customers live and work.

To accomplish the goal of serving these customers, Green Dot has made it a strategic priority to become the leading provider of prepaid cards and other types of bank accounts through the nation's best and largest community-based financial service centers. These locations, also known as check-cashing stores, are generally concentrated in inner-city neighborhoods, and we are excited by the opportunity to partner with these chains, both because it expands our mission to reinvent personal banking for the masses and it helps us serve the customers who we're trying to reach.

Project Outreach is off to a good start. And on that point, we are pleased to let you know that starting last week, and continuing to roll out through the end of the year, Green Dot products will be available in the following New York Metro area financial service centers, Right Check, David's Check-Cashing, and Pay-O-Matic, which is New York's largest community-based financial service center. Together, we believe these three chains represent about 50% of the New York area check-cashing market, which is the number-one check-cashing market in the United States. Of course, there's always uncertainty when you enter a new channel, and it's hard to tell exactly how well our products will sell in check-cashing locations, but we believe that Green Dot has a strong chance of becoming the leading prepaid card provider in this channel.

And to that point, we would now like to take a moment to explain why we feel that Green Dot's prospects are so strong in the financial service center channel. For those following online, please refer to our supplemental earnings presentation entitled, FSC Customers and Prepaid Cards. This is a research project that was commissioned by Green Dot and conducted by an independent third-party research firm called Bovitz Research. The survey has a national sample of approximately 450 check-cashing customers between the ages of 21 and 45. To start, the researcher listed the names of 16 major brands of prepaid cards sold in check-cashing stores, inclusive of the two brands that we have, which are the Green Dot brand and the RushCard brand. Then, people were asked about how they felt about prepaid cards in general that are sold in check-cashing stores. Notice that 57% of respondents say that cards sold in this channel are too expensive.

On the next slide, the research asks about brand familiarity in general of prepaid cards. Notice that the Green Dot brand has a commanding lead as the most recognized brand. On the next slide, you'll see that the Green Dot brand is the dominant choice for what consumers consider to be the best brand, by nearly a four-to-one margin. Turning to the next slide in the research, what brand do consumers think will protect them the best, if their money is lost or the card is ever lost or stolen? The answer again, Green Dot, by a nearly three-to-one margin. The question posed on the next slide is about ease of use. Consumers feel that Green Dot is far and away the easiest brand to use, by also more than a three-to-one margin.

Next in the deck, and perhaps most importantly, on slide 7, the research asks, what brand would the consumer be most likely to buy? Overwhelmingly, and at least by a three-to-one margin, more if you include the Rush brand, consumers say that they would choose Green Dot. And lastly on slide 8, what card do consumers think is the lowest priced and the lowest cost card in the survey? By a nearly four-to-one margin, consumers again say Green Dot.

There's good reason for consumers to feel this way. If you look at the next slide, you'll see an actual fee comparison between our Green Dot brand cards and the current leading card sold in check-cashing stores. Based on 2012 public disclosures, Green Dot customers pay, on average, $4.38 per month for their cards, not including cash reload fees. This compares to customers of our competitor's card, who pay on average more than $10 per month for their card, not including cash reload fees. I think it's also important to note that the fees charged by our competitor included around $25 million to $35 million in overdraft and NSF fees charged to their customers in 2012, whereas Green Dot cards have no overdraft or NSF fees of any kind.

As you probably know, both state and federal regulators are discussing the issue of overdraft fees on prepaid cards, and the topic of overdraft fees on payroll cards, in particular, has been widely written about in recent weeks in the major news media and is the topic of various regulatory investigations at both the state and federal level. But whether overdraft fees on GPR cards or payroll cards are made illegal or not, our strong conviction is that charging overdraft fees, and especially charging such fees to low-income Americans, is wrong. And so for that reason, Green Dot does not do it. So hard to know how successful we'll be in the check-cashing channel, but for all the reasons discussed and based on the research, we feel like we have a good, solid opportunity here.

So a lot of new information today on the call, and we understand it may be a lot to digest. But I think the overarching message that we'd like you to take away is that Green Dot has evolved. Today's Green Dot is not just a prepaid program manager that markets other bank's products at retail stores. Today's Green Dot Corporation is a multi-product, multi-brand, multi-channel, technology-centric bank holding company with a clear mandate and a clear mission to reinvent personal banking for the masses. In service to this mission, Green Dot offers consumers reloadable prepaid cards, mobile bank accounts, cash transfer services, gift cards, and the largest private label GPR card brands, like Walmart MoneyCard, RushSlide, AARP and NASCAR. And these products are offered directly to consumers through a number of diverse channels, retail stores, online, college campuses, social media, telco providers, the app stores, and now, in check-cashing stores. While there is always risk and uncertainty as we look to the future, I think it's fair to say that we feel good about how Green Dot is positioned as we head into our 2014 planning process.

And with that, I'll hand the call over to John Keatley to talk more specifically about our Q2 performance. John?

Thanks, Steve. Q2 was a really important quarter for us, because not only did we see the result of heavy competition and new risk controls on our business, we also absorbed a significant increase in our commission expenses at Walmart. We were pleased that, despite these challenges, we were able to deliver growth in revenue, adjusted EBITDA, non-GAAP earnings per share, and free cash flow, defined as cash flow from operations minus CapEx. I'll walk you through some of the highlights of the quarter and talk about how these results inform our revised guidance for the year.

First, let's discuss our second quarter results. As we expected, we continued to see a significant impact from new competition and new risk controls in Q2. But we also saw some encouraging evidence that these effects have begun to stabilize. We estimate that the impact of new competition and new risk controls was approximately 20% of revenue in Q2, in line with our expectations and consistent with the guidance we provided at the beginning of the year. We think that the impact of these headwinds is stabilizing at this level for a couple of reasons. First, our approval rate on new card activations has stopped declining, and actually improved slightly in Q2. We were applying the same tight screens on new customer activations that we applied in Q1, but the percentage of customers that we were able to approve actually increased by a couple of percentage points.

Secondly, we saw improvement in many of our key customer acquisition metrics in Q2. For example, the year-over-year change in new card activations, first-time reloaders and active cards all improved modestly in Q2 as compared to Q1. These and other metrics give us incrementally more confidence that we have established a new baseline for our business.

Offsetting the impact of the headwinds in Q2, the quality of our portfolio continued to improve. Once again, we saw a solid double-digit increase year-over-year in the number of accounts with direct deposit. We also saw significant increases in the average quality of the portfolio. Revenue per active card increased 5% year-over-year, and purchase volume per active card increased 12% year-over-year. Cash transfers continued their strong and consistent growth, up 13% per active card year-over-year.

I also want to point out that our adjusted EBITDA margins in Q2 grew by 120 basis points. This is really impressive, considering the significant step up in the commission rates that we pay to Walmart, which impacted two-thirds of the quarter. We were able to grow margins primarily by disciplined control of our sales and marketing expenses, including close monitoring of our advertising expenses, and improving our retailer distribution deals wherever possible.

We continued to generate strong cash flows in Q2 and maintain a very strong balance sheet. We had cash flow from operations of $63 million, which helped us increase our total cash and investment securities to a total of $579 million. Our unencumbered cash position increased by approximately $30 million during the quarter, to approximately $240 million. We define unencumbered cash as the cash and investment securities held at the holding company and not required to maintain regulatory capital ratios or liquidity requirements.

We have revised our guidance for 2013 to reflect these solid results and the continued resiliency of our business. We are raising our non-GAAP revenue guidance for the full-year from a previous range of $525 million to $550 million to a new range of $565 million to $575 million, which now implies modest growth for the full-year of our non-GAAP revenues. We are raising our adjusted EBITDA guidance from a previous range of $85 million to $100 million to a new range of $95 million to $105 million for the year, and we are tightening our non-GAAP earnings per share guidance from a previous range of $0.95 to $1.20 to a new range of $1.05 to $1.20.

The reason that we're not raising our earnings guidance any further is that the growth initiatives that Steve just discussed, including launching 20,000 new retail stores and entering the check-cashing channel, will require significant expenses in the second half of this year. These initiatives create the need to spend quite a bit of money on things like manufacturing, distribution, technology and the like, but most of the benefit from these investments doesn't come until early 2014. Plus, if regulatory approval is obtained, we expect to migrate the Walmart MoneyCard portfolio from GE Bank to Green Dot Bank, which comes with some one-time expenses. This includes updated packaging at all Walmart stores nationwide and updated websites, consumer disclosures and marketing materials. Similar to our other initiatives, we assume these expenses in the second half of this year, but the majority of the benefits won't be felt until early next year.

Looking ahead to 2014, we expect that these initiatives, combined with the natural organic growth of our core business off of its new baseline, will provide a solid foundation for growth. This concludes our prepared remarks. At this point, we're ready to take your questions. Operator?

(Operator Instructions)

David Scharf, JMP Securities.

Hello. Thanks for taking my questions. Hello, there. Wondering if you can hone in on a few things. Obviously, the second half is going to be a significant ramp in investment spending, as you mentioned. Is there any additional color or granularity you can provide to us on perhaps one-time costs associated with some of the larger distribution agreements, as well as how much is factored in for the GE conversion, when it takes place?

Sure. Hello, David. The biggest items that we have hitting in the second half are really nonrecurring in nature. You mentioned a couple of them. They include launching our products at 20,000 new retail locations, supporting the ramp-up of GoBank with both digital and traditional marketing, replacing packaging at Walmart stores with the new Green Dot bank cards and disclosures, and hopefully, completing the migration of existing accounts from GE Bank to Green Dot Bank, pending approval from the regulators. These are all big items. We're not going to provide specific dollars around each of them, but they are essentially focused here in the second half of the year and nonrecurring. Some of the other items that impact our margin guidance for the rest of the year, one is the higher commissions that we are now paying to Walmart. We only picked up two months in the first half of the year at the higher commission rate, and in the second half of the year, we have a full six months at the higher commission rate. And then of course, the seasonality of our business is such that our revenues do drop off a bit from the first half to the second half, and some of that decline flows through to the bottom line.

Got it. And, John, I know in the last couple quarters, you provided some growth rates for Walmart and non-Walmart usage revenue. Are you able to provide that this time?

Yes. The Walmarts' revenue concentration ticked up just slightly year-over-year, from 64% of revenue last year to 65% this year. So what that implies is that our revenues from Walmart grew 6% year-over-year in Q2, and the non- Walmart portion of our business was flat year-over-year.

Got it. And I believe during Q1, and it's not surprising, since it's refund season, you had mentioned that approval rates were down 10%. Did I hear you say that the approval rate actually picked up a bit in Q2?

Yes, and what I mean by that is it kicked up slightly from Q1. It was still down substantially year-over-year. There could be a number of reasons for that. I think one is that in tax season we do see a number of new customers who are less committed to the products, so they might be less willing to provide all the information that we needed to approve them. Secondly, I think that perhaps the true fraudsters actually clued into the fact that it's pretty hard to get a Green Dot card and went elsewhere.

Yes, there's a lot -- in Q1, David, there's just a lot more jokesters, for lack of a better word, because tax fraud is just so rampant. And we wanted to make sure that our bank was not a facilitator or receiver of those kinds of customer funds. So, Q1 we expected to have a more harsh reject rate. It did. But the fact is we're still rejecting quite a bit more than we did year-over-year, as I indicated in the prepared remarks. So it's been the biggest headwind I think we've had, maybe bigger than competition. But it's an important thing to do, and I would think that over time, other players in the industry will need to do and undertake similar measures.

Got it. And Steve, when you factor in the reject rate right now, as well as how you're trending at Walmart, better than planned, is the $100 million figure you proposed as an annualized headwind still a correct figure, or are you running ahead of that?

Yes, David, we do think that was about right. It's hard to drill down on exactly and figure out exactly how many customers you don't have that you otherwise might have had. But based on how are new cards are selling relative to our competitors at retailers, based on our approval rate on new card activations, and other cards that we're blocking based on suspicious activity, we do think that our revenues would be about $100 million higher this year, absent those two challenges. And unfortunately, these are challenges that we think are now stabilizing. They're not getting worse, so we believe we are establishing a new baseline for our business and that we're going to grow off of this new base going forward.

Got it. Thank you. I'll get back in queue.

Mike Grondahl, Piper Jaffray.

Thanks for taking my question. The first one is really, if you look at the opportunity in the 20,000 new retail locations and the check-cashing stores, what could that be as a percent of your business in a year or two?

Oh gosh, it's a great question and one that we have internal projections for, but none that we're prepared to share publicly. If you think of all of our retailers, today we're in 60,000 or 65,000 retailers, so this means we'd be in 85,000 or something. Not all retailers are equal, and there's sort of a segmentation where you have your --the 80/20 rule would certainly apply, as in every business. And so we have high hopes for Dollar General and Dollar Tree and the check-cashing channel, Home Depot and the other ones we announced. So we feel good about those. But it's hard to know how productive they'll be until we're there for a period of four, five, six months. But we think it can be a meaningful contributor to our non-Walmart growth. Having said that, Walmart's an amazing retailer and we work closely with them, and so we are always trying to grow that business, as well. So, hard to give you, I guess, a crisp answer.

Okay. And then maybe just as a follow-up, I think in John's prepared remarks, he made reference to improving retailer distribution deals, where possible. Can you give us a tangible example of where you've been able to do that?

Sure. I won't name any names of specific retailers, but we do have several contracts where in the past, the contract has specified a certain commission rate if we were exclusive and the only brand sold at the store and a different rate if there were other competitive brands sold in the store. So when competitive products were introduced over the past year, the commission rate that we pay to those retailers actually stepped down from the previous rate to the new rate. That's probably the best, most concrete example I can provide.

Okay. Thanks, guys, and congratulations on the progress you're making.

Thanks, Mike.

Ramsey El-Assal, Jefferies.

Hello. This is Ryan Kerry for Ramsey. Just a quick one on GoBank. As you're targeting more of a mainstream consumer and becoming more of a mobile technology, how has your view of the competitive landscape changed? Who do you see as your new competitors with GoBank that perhaps didn't register in the context of other prepaid card business previously?

Great question. So GoBank is an entirely different product. There's no Green Dot branding. We're organized by what's called agile stack, for those of you who know technology companies, we're an agile technology company. So we have individual stacks for every division, and the GoBank stack has its own marketing team and its own leadership and its own technology team, and to your point, its own set of competitors. So in the prepaid world, you tend to think of the usual suspects, whether it's Netspend or American Express, or this one or that one. On the GoBank side of life, it's your Main Street banks. It's Chase and US Bank and Wells Fargo and Bank of America, and anybody else who issues checking accounts and who plays in mobile banking. So that product has an entirely different set of competitors. And the leadership of the GoBank stack within Green Dot doesn't, frankly, pay a lot of attention to prepaid; and the leaders of the Green Dot stack don't pay a lot of attention to GoBank. And so it is a different set of competitors. That's a very thoughtful question.

Yes. That makes total sense. Thank you. Just one more. Can you guys give us an update on the CFO search?

We can. We've identified some very, very strong candidates, all from very, very large public, complex, well-governed companies, companies that you'll all know. And we're narrowing down that search. And John, as you know, is with us for another month; and by the time he departs, we would expect to have an announcement made, if not prior.

Fantastic. Thanks so much for the color.

Ashish Sabadra, Deutsche Bank.

Hello. Solid results. Just wanted to go over the guidance. You've raised the guidance, and wanted to parse through some of the details there on the revenue side. So you mentioned that the headwinds from these rejection rates have stabilized. And you also mentioned some revenue drop-off in second half. So I was just wondering if these trends are stabilizing, what's causing the revenue to drop off? And also in your guidance increase, have you incorporated any benefit from these new distribution channels, including any benefit from the check-cashing, as well? Thanks.

Sure. So first of all, in terms of the seasonality of the business, we see a higher level of activity in the early part of the year, primarily related to tax refunds. So some customers get a card as a way to receive their tax refund faster. Some people use the cash proceeds from a tax refund they get somewhere else and load it to a card. But we do see some -- an uptick in activity in the first part of the year, and then some of those customers drop off. So we do typically see our revenues in the second half of the year lower than the first half. So that's the seasonality I was referring to.

In terms of the new investments that we're making and the new growth opportunities we're pursuing, primarily entering the check-cashing channel, launching 20,000 new retail doors, the ramp-up of GoBank, these opportunities will primarily impact 2014. Even if the sales rate comes out of the gate quite high, it takes a while to build a meaningful portfolio of cards and the revenues associated with that portfolio. So the guidance for the second half of the year for revenue does not project much in the way of revenues from those new growth opportunities.

Okay. And thanks for that color. Quick question around the GE Bank. If you're able to transfer over from GE Banks, is it possible to quantify how much of the GE bank fees that you currently pay and how much will the company save, or how much will be the annualized saving going forward by that migration from GE Bank to the Green Dot Bank?

Sure. We have not broken out the fees that we pay to GE Bank, or paid historically to GE Bank, separately. In terms of quantifying the overall opportunity though, 2011 was the last year in which we outsourced all of our bank issuings. We're paying Synovus and GE Money Bank for all of our bank issuing. And in that year about 20% of our processing expenses were attributable to bank issuing fees. So that's the opportunity that we're going after. And we've taken out a piece of it by bringing in-house the Synovus portion of our portfolio, and we hope to take the rest in-house when we move the GE portfolio over to Green Dot Bank.

Okay. Thanks. Thanks for the color.

Sanjay Sakhrani, KBW.

Thank you. So I've got a question on the competitive environment, given the resiliency in your growth and your higher confidence. I guess, what exactly are the risks going forward, assuming there's no change in the price points? Is it something that happens at the point-of-sale from your vendors? And I guess secondly, I was wondering if there were ways you were contemplating on further leveraging the reload network? Thank you.

The competitive scenario has been fascinating to watch play out. And I'd like to say that it's all because of skill. A lot of that it was based on the blessings of having a good brand name and treating customers right over a lot of years, but it worked out fairly well. One of the things that we noticed is now that there's been so much competition, so much big competition from huge companies, not just in retail, but in banks like with the Chase Liquid card, which is a great product, and the Amex products, which are all very good, and so forth, is that the Green Dot brand has emerged even more in demand than ever. They used to be feeling, I think, by a lot of folks, maybe even including our own employees, that Green Dot was number one by habit. In other words, that we were the only card on the rack. We invented the industry. So this is just our natural place in life. And I think what all the competition did was really force a galvanizing moment with both the consumers and retailers. And I would come out and look at it nine months later or a year later, depending on the retailer, and people are overwhelmingly choosing the Green Dot brand, because they want it, not because it's the only brand on the rack. And so now when you now actually see those sales results at the retail locations who sell us, Green Dot has become a must-sell product, not a sell it just because we're the only brand out there kind of a product. And that's been a wonderful evolution that, frankly, we weren't sure we would see or should expect, but it feels like that's the way it's turned out, which is good.

In terms of risks, look, there's always risk in every business, old and new and everything in between. So I'd never say there is no risk. We certainly have lots of risk. But I think the top risk that we worry about is execution. We've intentionally changed a lot of management at Green Dot. We've changed a lot of our structure internally, as you know, over the past year. And it's paid off really, really well, with business development and with technology and all the things we've done. So the year-over-year change in the company has been pretty dramatic, in a positive way. And so our biggest risk, in my mind, is that we don't execute, that somehow we're not able to continue to hire the right kind of people, recruit the kind of brilliant young technology minds that we've gotten from the folks in Palo Alto at our division there, continuing to evolve our technology in banking and to make sure that we are a leader not just in prepaid, but going forward in mobile banking. So a lot of the risk is in our own ability to strategically be clean and crisp and to execute. We've done it very well over the past nine months to a year, and now we need to continue doing that.

In terms of the risk at retail, I think we're a well-respected brand. We sell well. Consumers ask for us. The technology works. So I don't see a lot of new, incremental negativity, if you will, happening over the next year. But something could happen that I'm not expecting or that I'm unaware of. Does that answer your question?

Yes. And just on the reload network?

The reload network is a fascinating asset. Obviously, we do a lot of reloads. I forget what the number is, John could tell me. But the year-end number last year was 40 million or something reloads. So that's a tremendous amount of reloads, and the majority of reload's done in the entire industry is done through the Green Dot reload network. But that's one application, which is the ability to get cash onto a prepaid card. And we have about 270 programs that use our network for that. But the technology that underlies the reload network, the connectivity into so many cash registers, the settlement engine that we have, where we settle billions of dollars with retailers nationwide, the way we structure it with our banking partners to make sure they guarantee good funds, that settlement engine and the technology that connects with all those retailer POS devices is an asset that we think could be used for other things down the road. And those are active conversations we have as we think of growth initiatives in the years going forward. So a very thoughtful and astute question. I wish I could give you something more specific, but I get the tone of the question and it's a fair point.

All right. Great. Thank you.

Julio, Goldman Sachs.

Hello. It's Roman in for Julio. Nice to see the evolving model here, guys, and just a question on the check-cashing initiative. What made you feel like you had a good opportunity to win some of this new distribution in check-cashing? It was actually encouraging to see you guys announce some meaningful wins already in the New York City area. But how does the pipeline look? What's the pitch like? What's the competitive edge, given that your main competitor there tends to be pretty generous with their revenue distribution, or revenue share, with their partners there?

Well, I think the check cashers get generous revenue shares. I think the company that issues the card gets even more generous revenue shares. And I think that it's a very, very high-priced product. And what we have found -- which is how everybody gets such high revenue shares. What we have found in talking to leading check cashers is more and more, the owners and operators of these large chains -- and like every industry, you have very small operators and you have more large, corporate-style operators. And at least at the larger corporate end, they want to have a product that's sustainable. They want to sell consumers a product they want. And they're as interested as we are into making sure that consumers can buy the right product from the check cashing store, so they don't end up buying it at the store down the street. And so I think in that regard, the competitive dynamic is no different than any other kind of retailer.

I think in terms of what our pitch is, Roman, it's simple. We have far and away the most desirable brand, the most known brand, the lowest cost brand. And we can sell it in that store at a fraction of the price of current product. So when you have the most desired product at the lowest price, it's a pretty logical match-up for anyone to sell. So we think our prospects are pretty good, and that's why we took the time to do that third-party research, which in many ways we did for our own exploratory to make sure we had a good chance in this channel. And it was just so overwhelmingly positive for Green Dot that we think we have a good chance at it. And the sales pipeline is very, very rich. There are still some check cashers who have programs that are high-priced, and they may enjoy those revenue streams and may not want to switch to selling Green Dot. But by having such success in New York, which is really a bell weather and well-respected market in the check-cashing industry, my sense is we have a good chance to roll out in other major inner-city neighborhoods and areas.

Okay. That's helpful. And then the comments on cash and the unencumbered cash position that continues to be positive, any updated thoughts on what kinds of things you hope to do with that cash?

Well, we like to use cash to grow. And I think what we've done over the past nine months is a good example. Rolling out GoBank, the purchase of Looped, which is what predicated the ability to roll out GoBank, the changing of Green Dot's entire technology underpinnings, rolling out all these new retailers, being able to have sufficient capital to satisfy the ability, should the regulators so approve, to bring on all the deposits and the programs from GE Money -- GE Consumer Retail Bank into Green Dot Bank. All that requires cash, and it requires cash reserves. And people want to feel confident when they're dealing with a bank holding company that there's a very, very strong, fortress-style balance sheet that backs up business initiatives of the bank.

Now at some point, you get an overage. At some point, go to a logical extreme, we're not saying we want to be Apple whatever it is, with billions of dollars in cash. But clearly, we think that having cash is a strength. We think the business over time will continue to consolidate. And we think we're clearly a business that will be sustainable and we will be here for a long time to come. And so cash right now feels better to me on the balance sheet than it does anywhere else, because it lets us do all the cool things we're doing. But at some point, we'll look at it and realize that there are other uses for it. So we don't ever rule out dividends or buybacks, but it feels shortsighted to do it right now.

Okay. Thanks, guys. Good quarter.

Thank you very much.

Greg Smith, Sterne, Agee.

Hello, guys. First question, are you seeing any change in the customer profile, whether by the demographic of the consumer or anything along those lines?

Well, the demographic is roughly the same, meaning age, sex, race, that kind of thing. But, we are seeing higher employment among our customer base, which is something that may be attributable just to the economy in general getting better. But we see better employment in the service sector, which is a big part of our customer set. And we see the products being used better. And there's a lot of debate, Greg, internally -- it's funny you asked the question. We were in a meeting just earlier this morning with some of our data folks, and there's a debate. The fact that the customer is behaving better, if you will, or that the metrics are improving, more direct deposit, more usage, more spend, more revenue, that's unquestionable. We know we have that, and we've had it now for more than a few quarters. The question is, why?

Some people think it's improving employment and macroeconomic conditions. Other people think that it's a natural maturation of the prepaid industry, a lot of articles, Consumer Guide now rates it, it's talked about on the news, for better or for worse. But it's a more mainstream product. Other folks think it's because of our risk controls, which make it, frankly, so difficult to get a Green Dot prepaid card that by the time you get into the funnel and you get the account, you treat it more seriously, because it feels more like a real bank account as opposed to a casual product you buy next to the People magazine at a retail store. And we don't know the answer. It could be a mix of all three of those things, but the trend to quality is undeniable.

Great. And then just can you talk about any progression you've made on the government side, and then also what are your latest thoughts on the payroll card business?

Well, on the government side, we've not done a lot with, and in fact, we've actually retracted a little bit. A big part of our risk controls was shutting down easy access to government direct deposits. There was a system called -- I may get this wrong, but I want to say ENR, which is something that banks commonly used, which make it easy for a person to change their Social Security and have it direct deposited into a new bank. It is easy for citizens to do that, also easy for fraudsters to do it. So we've actually made it even harder of all to get any kind of tax refund or government disbursement. So we still do many hundreds of millions of dollars and it, but it's frankly not a business that we've embraced. We need to work through the issues. And frankly, the government is working through the issues of how to control the fraud on these kinds of disbursement. So we've not done a lot with government payments, and probably are worse now than we've been in the past.

And then on payroll, we like payroll. The kind of payroll we like is the payroll that we do, which is just like Chase or BofA or anyone else. And that is, you have a Green Dot account, why not enroll in direct deposit and have your payroll proceeds delivered to your account? And there's lots of good reasons to do it. On our Rush Live product, we now offer early direct deposit. If the employer notifies us of their -- it's called a direct deposit advice -- in other words, if we get that advice from the Fed early, we'll credit the customer with their pay at that time, which can be one day or maybe even two days early. People seem to like that. So we do things like that to increase it. So, those are all the good things we're doing.

Okay. Thank you.

Reggie Smith, JPMorgan.

Hello, guys. Thanks for taking my question. I guess my first question is on the new distribution agreements. I guess, can you guys talk a little bit about whether or not those are going to be private label? So would it be like a Home Depot card, or is it still going to be the Green Dot brand? And then how are you guys thinking about pricing at those new locations? And then lastly, on that subject as well, just thinking about your current distribution, you're at Walmart, obviously, you're at a number of different convenience stores and pharmacies. How should investors think about the value of adding a new retailer when you seemingly have pretty good coverage of the United States? And then I have a follow-up on guidance. Thanks.

Okay. Anything else, sir? I'm just kidding.

So on brand, all the rollouts that we discussed will be the Green Dot flagship brand. In certain retailers, they'll also have what we call the Green Dot family of brands, which means we may also be selling Rush Live, AARP, NASCAR, and then the various flavors of Green Dot cards, like our bill pay card or that kind of thing, along with our Everyday Visa and Everyday MasterCard products. But they'll all be under the Green Dot brand. And increasingly, that's the brand that retailers want to sell, because the research is so strong on it and consumers seem to want to buy it. So that's your answer for brand.

On pricing, they're all pretty much our standard Green Dot pricing. Today if you look at our products around the country, you have the money card at $3. You have our cards in some other retailers on the Green Dot brand at $4, $4.95. In some cases, they're free, like at Rite Aid. In other cases, they've been on sale for $1 or free. They're all over the deck, depending on each retailer's individual pricing strategy. But these will be at a fairly standard price point. I don't think there's anything special, necessarily.

And then your last question was on, do incremental retailers help grow the company? And the answer is, of course. 100% of the people don't shop at 100% of the retailers 100% of the time. So every time you add a new major retailer in a different channel or that have different neighborhoods or different distribution, you increase the opportunity that somebody will sell or buy your product. If you look at mass distributed products like, say Coca-Cola, to this day they continue to add retailers or new machines or new vending agreements or new restaurant contracts. Because the more available the product is, the more often it's purchased. And in our case, also reloaded. So we work hard to get new distribution at quality retailers, because it's an important part of how we will maintain our core brand organic growth.

Got it.

And the only thing I'd add to that is, as Steve mentioned, that it's particularly important on the reload network that -- most customers will buy a card once, or actually in many cases, maybe twice over their lifetime. But they'll reload many, many times. So the more locations we can add on that Green Dot network just adds value overall to the network.

Okay. That make sense. And then, I guess, one question on guidance. Just looking at a very high level. You took the low end of your EBITDA range up $10 million. Rough math, to me that's about $0.15 in earnings, assuming D&A doesn't change. What am I missing there, because you took the bottom end of your EPS up only $0.10. So is there anything else that I should be thinking about? CapEx hasn't necessarily change year-to-date. So is there anything else that I may be missing? Thanks.

No, we generally round in our guidance to the closest $0.05, closest $5 million or so, so I wouldn't get too caught up in those kinds of subtleties. But it is fair to say that we do expect some fairly significant depreciation and amortization expenses in the second half of the year. We rolled out GoBank. We developed a lot of internally developed software to support GoBank, and we continue to add new features to the product. So we do expect D&A to ramp. We're also investing heavily in technology to support the launches of all these new retailers and to customize our existing product for the check-cashing channel, which require some work and some integration with the POS systems of not only the 20,000 new retailers, but also in that the check-cashing channel. So some of that software development work was not anticipated earlier in the year. And some of that will impact our D&A, which causes little bit of that separation that you're seeing between the adjustment to EBITDA and the adjustment to EPS.

I think also -- and John, you may or may not feel comfortable providing it -- but I think in some of the questions, people don't understand the magnitude of how much it costs to remerchandise entire retail chains. It is not an inconsequential cost. When we talk about rolling out 20,000 new doors, you're paying merchandisers to physically touch every one of those retailers, to hang products on rack, to print the products, the terms and conditions that go inside of them, and everything else that goes with it. It's in the many millions of dollars to do that kind of thing. And when we talk about the bank migration, if we're lucky enough to be approved by regulators to get that done, and you roll that out in Walmart, now you have packages in Walmart that say issued by GE Consumer Retail Bank, and there's terms and conditions that have been written by that Bank's legal counsel, and it's going to be replaced with a different bank and different product. Well, you think about all the millions and millions of packages that we go through at Walmart on an annual basis, and then the merchandising cost that's part of it, plus the change in terms notices that the law requires you send out to millions of consumers, you're talking about a huge amount of money that has to be all poured in to the expense line item in the second half, the return of which you don't really see at all until you get into 2014. So, it's a very, very sizable whack, I guess, against margin that I just wanted to comment on a little bit, because it may not be obvious just as we talk about it casually.

And yes, just to follow up on Steve's comments, 20,000 new retailers that we're essentially growing our retail footprint by a third. So this is a very significant opportunity and investment for us. The Walmart, the GE Bank migration, launching in the check-cashing channel and remerchandising all of the Walmart stores, these opportunities together, you're solidly into the eight figures, in terms of just the magnitude of the investment for those opportunities. They're all great opportunities and we're thrilled to spend that money to have the new distribution and to be on our own bank, but it is a significant, essentially one-time, investment.

Was that helpful?

No, it was. And I don't know if I'm the last person in the queue or not. But if so, I'd like to sneak one more in.

Well, we have five or six more.

We'll catch up afterwards.

We like you so much, get back in queue and maybe we'll keep going.

Cool.

Okay. Very good.

Smitty, Morgan Stanley.

Thank you. On the regulatory front, can you please share with us what's the latest that you're hearing about potential prepaid regulation that's on the CFPB's docket?

Well, I think the CFPB has done a great job of being very, very open and public and transparent about all their thoughts and all their thinking on prepaid. As you know, some months back -- I forget when, but it's been a good while now -- they issued an ANPR, which is announced notice of proposed rulemaking -- thank you very much. I was going to say public -- proposed rulemaking, which means that these are rules we're thinking of making and what do you all think about it, and then folks can debate. And that's talking about, do they put Reg-E on cards, should cards have FDIC insurance. I forget what else is in there. There's a lot of discussion about overdraft fees. As you know, there's been a ton of recent regulatory inquiries on overdraft fees on payroll cards, which has created a lot of stir, if you will, in the payroll industry. And so that's the kinds of things they're angling for.

And I also want to be clear, because we have many people listen to these calls, not just investors, that we actually agree with everything we've read from the CFPB. We think they're on track. We view part of Green Dot's mission to be consumer advocacy, and we don't think we should be charging overdraft fees on payroll cards to people making $8 an hour, $10 an hour. It's just a bad thing for the industry and a bad thing for the customer. And we agree with Reg-E protections, which means if your card is lost or stolen or you have a fraudulent use of your money, that you can call the bank and expect to get it back. You expect it from a checking account, you should expect it from a prepaid card. And we're a bank and we do that. Not everyone does. And of course, FDIC insurance, which today, most insurers do already.

So I think that's the biggest discussion out there. And then the latest brouhaha in the past three or four weeks has been all the payroll card stuff. There's been a ton of articles on NPR and in the New York Times and many, many others about that particular issue. So that's pretty much what's out there today in the world of regulatory discussion. There may be some I'm missing, but those are the big topics.

Great. And then just a quick follow-up on the new distribution channel. When do you expect to complete the rollout into all 20,000 retail locations?

We should be in good shape by Christmas, I would think. And the reason I say that is Dollar General's done, or almost done. Home Depot is at the early stages. That's a big chain, so that could take a few more months. I would say if you said by Christmas time, that's not a bad guess.

Great. Thank you.

George, Credit Suisse.

Thanks for squeezing me in, and congrats on the quarter. Wanted to start off, just looking at the sales and marketing expense line 2Q versus 1Q as a percentage of revenue, it actually stayed pretty flat despite the higher commissions coming in at Walmart. And just wanted to get a little bit of color as to why that did not go up more? Is it voluntarily pushing out some more marketing expense to the back half of the year, or maybe something else?

Yes, that's essentially it is we're keeping a pretty tight control on our marketing expenditures here, monitoring ROI on any advertising campaigns closely. Also, we didn't have really any major resets or remerchandising of major retailers during the first part of the year and in Q2. That's going to change now as we launch these 20,000 new retailers, so you will see those sales and marketing expenses start to pick up as we create new displays, create new packages and send merchandisers into all those stores. But those are the reasons.

I think we've done a good job on SG&A, too. It's not just marketing expenses. So I think we've done a decent job altogether. Yes, but we appreciate you noticing. I think we clearly are running the ship in a tighter fashion than ever before as it relates to costs and making sure that every initiative matters.

Great. That's helpful. And just one last question on Project Outreach. If we look at the commission structures that you now have in place with some of these new check cashers, how does that compare with your legacy business? Or maybe should I ask that, how does that compare with your legacy business ex-Green Dot -- ex-Walmart?

Well, it's different. How does it compare? That's a good question. I'm not sure, because they're different. Check cashers look at their customers over a life cycle. There's higher direct deposit enrollment at check cashing locations, because it's more of an assisted sale. And they have a different kind of a rev share. So it's really hard for me to ad lib that answer, I guess.

Yes, there are similarities and differences, but we generally don't get into the different sort of commission structures between different partners and different channels.

I think what's most important, though, is that everybody wins. The check casher gets a rev share that's competitive to what they're earning today. The consumer gets a product that they actually want for the brand they want at a price that's fractional to what they've been paying. And Green Dot gets nice incremental expansion for ourselves and our investors. So it really is a win-win-win kind of deal.

Okay. Thanks, guys.

Thanks.

Ashwin, Citi.

Hello. It's (Inaudible) on for Ashwin. I had a follow-up question on the money card portfolio. Any thoughts on timing and what would the impact be on the unencumbered cash position?

So I'll let John answer the question about unencumbered cash. On the question of timing, it's hard to know. I don't even want to guess. We should have word one way or the other over the next few months, is a fair global statement. And then in terms of impact to cash?

Yes, there are two big ones. The deposits moving into the bank are quite significant, so we will require some additional capital, as well, that we'll have to push down to the bank. We'll also be essentially paying off or making GE Bank whole on any remaining overdrawn accounts at their bank. So the total impact to cash is close to $100 million to complete the migration, probably a little less than that, but in that ballpark. So it'll be a significant hit on our unencumbered cash position.

Yes, still, to be clear, we're not spending the cash. It's still our cash that's in the bank, but it's no longer unencumbered.

Completely understood. And then the question on pricing. I'm surprised we got this far in the call without talking about it in too much detail. But you've been selling against the Bluebird product, which is lighter on fees, over the last few quarters. Any updated thoughts on pricing and perhaps what Walmart's thinking about pricing, as well?

Well, that part I can't answer. That's a better question for Walmart. But I can tell you that a couple of interesting things have happened. One, you saw the -- or hopefully will take time to look at the research deck that we alluded to in our check-cashing channel conversation that talks about pricing. It's also interesting to note -- and I haven't yet read the full report because I was printing it out as I was walking into the studio here. But Consumer Union came out with their first-ever review of prepaid, and maybe you've had a chance to see it. They looked at 18 brands, all the usual subjects, and frankly a lot of suspects that were not usual, that hadn't heard of, but there were 18 of them on there. And Green Dot rated number 3 out of 28 brands that they tested in terms of value, convenience, safety, and there were three or four other things that they rated there. And the two that beat us was Bluebird, if you have direct deposit, on the Amex label, and then H&R Block, which of course you can only get at tax time.

So really, it's the number one rated consumer card. And that's on the heels of winning an award -- and help me out, Chris -- it was the Card Hub Best Card in America for Checking Account Alternative, and again cited our low fees and our fair fees. And you can see by our actual financials how incredibly inexpensive a Green Dot product is. And the Walmart cards are less expensive, under the Walmart MoneyCard name. So while there is price compression that we think will happen in the industry, it's going to happen in the industry at the very high priced providers that are on that list. And Green Dot is so clearly not one of them. And we are now getting more and more third-party validation of that fact. So will there be price compression prepaid? I think so. But what I mean by that is that it's going to come closer to Green Dot's pricing, with free ATMs over time and fee waivers and easy disclosures and no overdraft fees. And today the industry is replete with a lot of programs that charge those things. So we feel pretty good about our price point, and we feel good that independent services like Consumer Union feel the same way.

Okay. And one, just last follow-up on a similar point. I know it's a separate product, but any thoughts on revenue from GoBank customers, how that would compare to your prepaid customer base?

Well, so it's hard to know. We talked about the fact in the prepared remarks that it's trending equal to or better than what we had modeled in our test kitchen, so to speak. So we're pleased with that. But it's three weeks old, so it's hard to garner conclusions from a three-week-old checking account. We think that -- if I had to guess, I would say that the revenue in any one month would be less than a prepaid card, but that the lifetime revenue would be considerably higher on GoBank, because the retention on a checking account is considerably higher than any prepaid card program. And so lifetime revenue, higher; revenue in any period, probably lower. But very early on. But that's probably my best guess.

Okay. Great. Thanks.

Thank you.

I think that does it.

Ladies and gentlemen, at this time, we have reached the end of today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

Thank you, operator, and thank you, everybody. Good-bye.