Green Dot Corp (GDOT) 2016 Q3 法說會逐字稿

Good afternoon and welcome to the Green Dot Corporation's third-quarter 2016 earnings conference call. Please note, this event is being recorded.

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

Thank you and good afternoon, everyone. On today's call we'll discuss 2016 third-quarter performance and thoughts about the remainder of the year. Following these remarks we will open the call for questions.

For those of you who have yet accessed the earnings press release that accompanies this call and webcast, it can be found at ir.greendot.com. Additional operational data has been provided in a supplemental table within our press release.

As a reminder, our comments include forward-looking statements about, among other things, our expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the Securities and Exchange Commission, including the most recent form 10-K that we filed on February 29, 2016, for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements.

During the call we will make our reference to financial measures that do not conform to generally accepted accounting principles. For the sake of clarity, unless otherwise noted, all numbers we talk about today, including revenue per active card, will be on a non-GAAP basis. The information may be calculated differently than similar non-GAAP data presented by other companies.

Quantitative reconciliations of our non-GAAP financial information to the most likely comparable GAAP financial information appears in today's press release. The content of this call is property of the Green Dot corporation as is subject to copyright protections.

Now I'd like to turn the call over to Steve.

Thank you, Dara, and welcome, everyone, to our third-quarter earnings call. I'm pleased to report that Q3 was another good quarter for Green Dot, led by continued strong revenue performance from our new category of prepaid cards that rolled out earlier in the year and better-than-expected performance from our Green Dot direct division. We also enjoyed better-than-expected bottom-line performance led by the success of our ongoing cost savings initiatives that favorably impacted SG&A and supply chain costs, combined with the expanding margins on the prepaid card business as a result of the new fee plans and better customer behavior that combined to deliver materially better unit economics from our base of active cardholders.

Total non-GAAP operating revenue came in at $154.6 million, representing a 5.6% year-over-year growth rate. With adjusted EBITDA coming in at $23.8 million, a growth rate of 7%, even with the inclusion of $2.3 million in unusual incremental launch expenses in the quarter and the additional burden of a $1.5 million write-off of an uncollectible receivable from a prior period.

Non-GAAP EPS for the quarter was $0.21 versus our expectation of $0.16. This equates to year-over-year non-GAAP EPS growth of 40%, including those incremental unusual expenses in the quarter. We did better than we guided as a result of slightly lower D&A, a better tax rate related to tax credits, and of course the fact that we achieved a better-than-expected adjusted EBITDA result. The high-level summary of the quarter is that the year's playing out along the thematic that we laid out when we provided full-year guidance on the February call.

Non-GAAP total operating revenue, adjusted EBITDA and non-GAAP EPS results are all improving steadily quarter after quarter on a year-over-year basis. For example, non-GAAP total operating revenue was minus 1% year over year in Q1, then we had plus 1.6% year over year in Q2 and plus, as you just heard, nearly 6% in Q3. That headline is encouraging especially when much of that revenue is of a higher-margin nature and is then layered onto and increasingly more efficient operating platform.

Mark will provide some key stats on our card portfolio later in his section, but I do want to call out our direct deposit penetration which continues to improve very nicely, up 15% year over year and the quarter, with 67% of our total card-loads now coming from direct deposit as of Q3. We are seeing direct deposit growth as both a percentage of active cards and growth in the absolute number of direct deposit accounts.

The quality of our direct deposit customer is very strong relative to many other prepaid programs, because substantially all of our direct deposit customers are self-enrolled as opposed to a card that a customer receives, say as a payroll card from an employer or as a disbursement card in lieu of cash. In our case, substantially all of our direct deposit enrollment is a result of a customer buying the card and taking the initiative to enroll themselves in direct deposit through their employer or benefits provider, just as you all have likely done with your own checking account. We have many initiatives in development to continue to make that self-enrollment process easier and more intuitive for our customers.

As you know, earlier this year we introduced the framework of a six-step plan to drive growth and deliver at least $1.75 in non-GAAP EPS in 2017. We remain focused on this six-step plan and I'd like to share our progress on each step.

Our first step was to launch new more appealing products with materially better unit economics at all 100,000 Green Dot retailers. These new products are doing very well for us and seem to be attracting a more committed customer base. We see this commitment not just in terms of the usual KPIs like higher [GVD] and higher spend and higher direct deposit enrollment rates like we just discussed.

But we also see the commitment in terms of the adoption of features. For example, thousands of customers now write checks to pay their rent and for other reasons. Thousands deposit checks using their mobile phone camera. Many thousand send P2P payments to one another. And download rates of our mobile apps from the Apple and Google Play app stores have grown more than 600% in just the past 24 months.

Another interesting stat is that we now see around 70% of all incoming web traffic to Green Dot brand internet properties coming from a mobile device browser, up from practically 0% just maybe two or three years ago. Another example of customer commitment is the rapid adoption of our new savings account feature on the Walmart MoneyCard. In just the first 60 days of launch, MoneyCard customers have put away tens of millions of dollars into their integrated savings vault feature on the MoneyCard app in order to save up money for a rainy day or for that special purchase.

As you may know, most Americans, even middle-class Americans, don't save up money like they used to in the old days for the future or for a rainy day. And what we are proving is that with an intuitive mobile UI and a good offer, like the chance to money every month just for putting money away in the savings vault, even the lowest-income Americans can now enjoy the peace of mind that saving up money for a rainy day helps provide.

Between the improving revenue generating characteristics of our legacy card portfolio and the strong unit economics our new card products, we're benefiting from material year-over-year organic growth in our prepaid card business line. As you'll recall from when we originally discussed 2016 guidance, we estimated that we would need to generate an additional $35 million or so of organic revenue growth just to make up for the MoneyPak-related losses in 2015. The fact that we are actually up year-over-year in revenue is a really good sign.

The second step was the reintroduction of MoneyPak with new risk controls. The new MoneyPak which rolled out at retailers in April and is currently on sale at around 40,000 Green Dot retailers, including Walgreens, Rite-Aid, Kroger and more recently CVS and Dollar General.

Distribution on the associated sales volume has ramped nicely since its reintroduction and we are pleased that the customer experience and the new risk controls seem to be working and performing well. As we get back to critical mass distribution with MoneyPak, our next goal would be to develop new and more compelling ways that MoneyPak can be used to sell customer paid points in new and disruptive ways.

The third step was to make modest investments in high-potential initiatives that align with our road map for growth. Examples given were our new secured credit card called Green Dot Platinum VISA and our Uber 1099 disbursement solution set. The Green Dot Platinum VISA credit card program is up and running and attracting good customer traction with thousands of cards applied for and approved.

Now we need to see how many of these customers will activate their cards once they get them at home and whether they will make their cash security deposit. And then whether they'll make their monthly payments on time so we can help them build up their credit score over time. But we are pleased so far with the roll-out.

Adoption of our two programs with Uber is also going well, with continued growth for both our GoBank checking account service and the Instant Pay to any debit service that we launched earlier in the year. We wondered whether the availability of Instant Pay to any debit card would harm GoBank checking account enrollments but, in fact, adoption of both services is growing nicely.

The any debit program in particular has scaled very fast, with millions of transactions completed so far. The program is a real hit with drivers and we are very pleased to serve as the bank of Uber for these innovative offerings.

The Green Dot asset stack is really quite unique and special. Deep fin-tech and payments expertise, high-scale comprehensive program management and a well-capitalized bank that can move as fast as our Silicon Valley partners. We think we have real opportunities in this whole 1099 faster payments, instant money processing space and we're pursuing our strategy to address opportunities as we see them. We believe that our money processing division, the same division that owns MoneyPak and our swipe reload network can become a big driver of growth for Green Dot over time.

Step number four was to launch major platform initiatives that are intended to drive significant cost reductions this year and next. We've already made good progress on reductions in cost across the consolidated enterprise and we have a high degree of confidence that we'll be able to achieve our efficiency goals for 2017. We'll share more of that detail with you on our fourth-quarter earnings call when we guide 2017.

Steps five and six have to do with return on capital and capital allocation. I'm pleased to let you know that concurrent with our five-year anniversary this month of the acquisition of Bonneville Bancorp, later renamed Green Dot Bank, our required 15% Tier One capital requirement expires, thereby enabling the bank to establish a more typical capital reserve ratio for a bank of our risk profile.

While we've not yet determined the exact amount of our new Tier One capital reserve requirement, we expect it to be significantly lower than today's 15%. So this means we expect to be freeing up a fairly significant amount of cash over the next few months that we can then use to make acquisitions or pay off debt or buy back shares.

Additionally, you may recall that we have a request pending with the Federal Reserve to allow us to invest our bank's balance sheet in a more traditional mix of long- and short-duration investments. Our current commitment requires us hold the majority of our bank's investable balance sheet in cash and cash equivalents, which causes us to generate very modest annual returns.

But should we secure commitment relief from our regulators, we'd expect to be able to generate significantly higher returns on assets, with those returns dropping to the bottom line on a consolidated basis. In aggregate, the ability to tie up significantly less capital to run our bank and the opportunity to more profitably use our bank's balance sheet to generate new business opportunities and higher returns on assets, are all good things that we expect to benefit Green Dot's consolidated financial results over time.

Now, let's talk about capital allocation. We continue to be committed to share buy-backs and are highly interested in making accretive and strategic acquisitions when can find them. We still have $50 million remaining in the buy-back authorization which we expect to execute in 2017. And while there's nothing definite to report, we do continue to still look at deals we think would be a great fit for our Company and a great deal for our investors.

Before I turn it over to Mark, I want to provide two other updates. First, you now all know that the CFPB issued their prepaid rules. It's a large document of nearly 2,000 pages, so it would be hard for me to comment specifically on each aspect of the rule. But I can let you know that we are in agreement with the spirit of the new rules and we think that the CFPB worked thoughtfully, cautiously and diligently to craft a rule that protects consumers, ensures a level playing field and does its best to achieve the right balance of regulation and free markets innovation.

While no rule is perfect, and I would expect some implementation hiccups here and there, our initial view is that Green Dot will emerge unscathed with no material financial or operational impacts to our business. It's gratifying to know that prepaid can now graduate from the perception of some as a fringe product living outside the mainstream of banking, into the mainstream of regulated bank accounts, and in so doing, finally allow us to move past the long period of regulatory uncertainty.

Finally, today I want to let you know that Kostas Sgoutas, my long-time partner in the business and good friend, will be transitioning from his current role as Chief Revenue Officer effective the end of this month. Kostas has been at Green Dot for nearly 12 years and has served as Chief Revenue Officer for about the last five years. Kostas will continue to work with Green Dot, reporting directly in to me for the next several months in the next year while he focuses on select new initiatives where his time and creative energy will help add value. Kostas is deeply respected by everyone in the Green Dot ecosystem and has been instrumental in building and growing our Company for more than a decade. We are all so appreciative of his many contributions over so many years.

Replacing Kostas in the role of Chief Revenue Officer is Brett Narlinger. We welcome Brett from Mercury Payments, the high growth and leading fin-tech merchant processor where Brett served as Chief Revenue Officer prior to its sale to Vantiv. Before Mercury, Brett served as Executive Vice President of Bank of America Merchant Services and prior to that spent over 17 years leading the enterprise sales efforts for First Data Corporation.

Brett is a deeply experienced sales and revenue leader who is known to be an aggressive, highly accountable and highly ethical business builder who has a strong track record of success in recruiting and managing world-class revenue teams. Kostas and I both agree that Brett is someone who will be great fit in the Green Dot's performance culture and we both look forward to him starting in his new role on November 28.

And with that, I'll now hand the call over to Mark Shifke. Mark?

Thanks, Steve. I'd like to start by providing some insight into our strong performance in the quarter on the top and bottom line, followed by commentary on our two business segments and how they each contributed to our results.

First, I'm pleased to report that we delivered $154.6 million in non-GAAP total operating revenue. Recall that due to MoneyPak's discontinuation in early 2015 had the negative impact it had to active cards and associated revenue over the course of the year, we started this year with an approximate $35 million headwind that we would need to grow past just to break even in 2016 on a year-over-year basis.

As we look at our quarterly performance sequentially over the year, non-GAAP total operating revenue was down 1% in Q1 and was up 1.6% in Q2, and then was up again 5.6% in Q3. We expect Q4 non-GAAP revenue to be up year-over-year as well and we will discuss this expectation as part of guidance later in the call. So this trend shows our growth plans are working as expected.

Revenue growth came from all product lines, including prepaid cards, GoBank accounts and cash transfers. In our account services segment, the quality of our portfolio continues to drive revenue growth. Account services revenue grew by 5.4% year over year and revenue per active increased 16% year over year.

We believe this increase reflects a shift in the mix of our active card portfolio toward higher-revenue-generating customers as compared to 2015. You can see evidence of customer quality with our third consecutive quarter of increases in purchase volume which was up 2%, and gross dollar volume which was up 6% despite active cards being down 9%. Direct deposit penetration as a percentage of active cards was up for at least the tenth consecutive quarter year over year, posting a 15% increase in the percentage of active cards receiving direct deposit.

Our processing and settlement segment also delivered solid results. This segment is up 5% year over year with revenue per cash transfer growing by 6% year over year. We expect this trend to continue primarily because we no longer offer free reloads on our new prepaid card products, while the previous card products that are still able to be reloaded for free are slowly becoming a smaller portion of our total active cards.

In addition, the new MoneyPak sells for $1 more than the old MoneyPak. As such, we would expect our average revenue per reload to continue to rise, so it's encouraging to once again see organic growth from this legacy business line.

We also enjoyed solid performance on margins. Adjusted EBITDA in the quarter was $23.8 million, including the absorption of approximately $2.3 million of incremental expenses in the quarter associated with launching our new prepaid products in approximately 100,000 retailers. On top of that, we also booked a write-off of $1.5 million related to an uncollectible receivable from a prior period. So despite the burden of those combined $3.8 million in expense in the quarter, we were still able to expand consolidated margins by around 25 basis points on a year-over-year basis.

Margin expansion is being driven in our legacy business lines by what we believe to be four sustainable and repeatable factors. One, higher revenue per active card from our installed base of older prepaid cards. Two, better unit economics on our new suite of prepaid cards. Three, a continuing trend of higher revenue per reload transaction. And four, an increasingly more efficient operating platform, allowing more of that incremental revenue to fall to the bottom line.

Non-GAAP EPS came in at $0.21, representing year-over-year growth of 40% even with the absorption of those incremental expenses in the period. This outperformance was due to better-than-expected adjusted EBITDA performance in the quarter, combined with $0.01 of lower depreciation and amortization and $0.02 attributable to tax credits we are now allowed to fully recognize that yielded a lower-than-expected tax rate.

Now let's discuss our thoughts for the remainder of 2016. As we are now nearly halfway through the fourth quarter, we expect to finish the year at the high-end of our non-GAAP revenue guidance range of $708 million to $713 million. But we expect to finish the year at the low end of our adjusted EBITDA guidance range of $156 million to $160 million. This implies that we see around $4 million of higher-than-expected expenses unfolding in Q4.

Approximately $2 million of this incremental expense is due to a decision to invest higher marketing dollars towards a program that has been delivering a strong return on investment. While this incremental marketing spend is a negative in the quarter, it's expected to be a worthwhile positive in future periods, which is why we are spending the money now.

The other approximately $2 million is due to higher-than-expected fees being charged to us by the payment networks, primarily driven by a higher-than-expected number of ATM transactions and purchase transactions in the quarter, combined with higher-than-expected fees on those ATM and purchase transactions. We believe we have an opportunity to get at least part of these fees reduce going forward, but likely not in time to benefit this Q4. A full-year result of $156 million of adjusted EBITDA is expected to deliver full-year EPS that's above the middle of our non-GAAP EPS guidance range of $1.39 to $1.44.

So in summary, our top line for the full year is looking strong and on track to deliver the high end of our expectations. And the bottom line is proving to be quite resilient with full-year adjusted EBITDA expected to finish at the low end of the guidance range, delivering non-GAAP EPS at above the midpoint of the guidance range. These results are despite absorbing the $2.3 million of launch expenses in Q3, plus absorbing higher-than-expected expenses of an additional $5.5 million on top of that for the second half related to the prior period write-off that we took in Q3 and the incremental marketing spend plus higher-than-expected payment network fees in Q4.

As we begin to turn our attention to next year, we are encouraged by the financial trends we are seeing across our enterprise, including improvements in both consolidated top-line and bottom-line results. And we remain on track towards achieving at least $1.75 in non-GAAP EPS in 2017.

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

(Operator Instructions)

Ramsey El-Assal, Jefferies.

Nice quarter. Wanted to ask about the commentary, Steve, that you made on the Tier One capital ratio, expecting that potentially to come in lower, freeing up some cash for corporate use. Can you quantify that for us in terms of sensitize it, I know you don't know the final number, but say it is 10% rather than 15%, what does that mean exactly?

I can give a range of options. The way it works is that we would meet internally and risk-weight the assets on the balance sheet. We'd have an objective review of that, decide on it, meet with our regulators and see if they agree with that review of our risk weighting. Then if we agreed, we'd lower the capital ratio to something normal for that kind of risk-weighted bank.

So if you think of the world of possibilities without regard to Green Dot Bank, if you look at other banks in our world that have, frankly, riskier assets than we do, which today is almost all cash, anywhere from 7% to 9% is fairly typical. We don't know if we'll be in that range or not, but that's just factually if you look at other banks call reports and capital reserve, sometimes less, sometimes as low as 6%.

If you think about us going from 15% to half of that, or 15%, something less than that, you can figure out the range of cash. We have about $140 million of Tier One reserve in the bank today. So if you're able to wipe out half of that, let's say, and enable -- well, that would be $70 million.

But it's hard to know where we'll be and we want to take a really careful approach to that. Because the goal is here to free up cash that's appropriate but make sure that the Bank is always being run with an extraordinary eye on conservatism and safety.

And any preliminary thoughts on prioritizing that if it were to materialize? Any thoughts in terms of returning to shareholders versus M&A versus other uses?

Well, whether we did -- the answer is no, not that I can talk about on the call. But we like share buy-backs, we've done $100 million so far. We have another $50 million left in the authorization, so we like that.

And we like buying companies that they can be highly accretive. And I think we've done a good job with that as well.

So it could be either of those two things and both would, in some ways, return cash to shareholders. But to your point, we want to put it to work and we want to put it to good use to generate a better EPS.

Okay. I wanted to ask about the new products you've launched and the pricing and the impact of that pricing going forward. I understand that there's a critical map that has to be achieved in your portfolio wherein these new cards basically start to supplant over time the old cards, and then the more favorable economics show up.

Two questions. First, where are we in terms of this mix shift in the portfolio from the new economics -- towards new economics, away from the old economics?

And then I'm trying to get an understanding of how that impact should be felt over time. Is there some type of an inflection or tipping point where we see a more dramatic depth function impact from the new pricing? Or is it a more gentle tailwind that feathers in over a long period of time?

Yes, listen, that's a really strong question, and one that I can't give a lot of precision to. The answer is, you think of two cohort maps on a wall or on a white board -- or waves. I'm trying to think of a visualization here. You have the old cards trailing down over time. You have the new ones ticking up over time.

And to your point, there's this critical mass that generally, if you look at our disclosures over the years, if you have an average turnover of eight months, then maybe it's six, eight months. But the problem is that average is not particularly predictive because you have direct deposit customers we retain for years. You have one-and-dones you retain for an hour. Then the mix of that is that eight months.

So as the older customers maturing get better, they stay on for a longer time. I would guess, without looking at the cohorts, you just had to take a wild guess it's going to going to be anywhere from a year to a year and a half. So call it Q2 of next year you'd expect to see something.

At the same time, though, what we're seeing, which is really positive, it's why we're seeing the margin, the performance ramp-ups so quickly, is that our remaining cardholders, in other words, you remember in the last earnings call I described that softball with a hard-core center, that hard-core center is still really hard and it's still there. So why you're seeing so much growth is you have the benefit of both your new customers with better unit economics coming on board and you have the old customers still hanging in there delivering very seasoned economics. And it's combined to be something slightly better than what we had forecast.

So far, so good. What we want to do is sell more cards in appropriate ways, not by discounting cards and having customers that don't produce a lot of value. But finding other channels, doing win-back campaigns, doing a better job of Green Dot direct. Our leader of that division, a fellow named Dave Petrini is spectacular and has that dialed in so wonderfully with his team, a fellow named Greg Pateco, who runs that marketing division. And so we want to find more ways to get those quality customers on board, which delivers more value.

Okay. And then quick last one for me. Mechanically on the new MoneyPak, are there incremental risk controls -- are the incremental risk controls on that product all on the back end? Or do the customers have to jump through more hoops or show ID or are there more stringent front-end requirements? I'm trying to get an idea of how the value proposition or the process for the consumer might have changed.

Right. It's all back-end. The trick to selling products at a retail store is a bottle of ketchup always has to be a bottle of ketchup. So a little retail analogy for you -- meaning that it's always got to work the same. When you buy a MoneyPak it sells the same way it's always sold over the past 15 years.

But before you can redeem it, if you will, you scratch off the back of the MoneyPak, sort of like a lottery ticket, and there's a number, a PIN number on the back. The act of redeeming that PIN number now requires you to register at MoneyPak.com and to us to verify your identity, take a lot of information from your mobile phone and other things we do, to validate certain velocity controls and thresholds.

So the answer is there's more weight to the initial transaction. You have to enroll online and register like you would for any service. If you wanted to be Amazon Prime, you're going to fill out a form and provide some information. MoneyPak.com worked the same way.

So that's where the risk controls take place, is after the sale. Because the nefarious activity wasn't with the purchase of MoneyPak, those were the victims, if you will. It was with the people redeemed MoneyPak. So the controls are more on the redemption side.

Great. That makes a lot of sense. Thanks so much.

Sanjay Sakhrani, KBW.

This is actually Stephen [Klaus] filling in for Sanjay. The first question I have was around the M&A. You mentioned that's one of the areas that you could potentially use your excess capital towards. What are some of the areas of potential interest?

Let me do some live editing. We always look for companies that are accretive to our segment, of the world of banking and finance, which is low- and moderate-income Americans. So it could be other prepaid programs, to the extent there are those of value left. It could be when we bought TPG, for example. It wasn't prepaid but it was a company that dealt with the same customer segment that we cater to, and it was a really logical add-on to us. It can be technology companies that have some technology that we use in our business every day.

But the general framework we look at is, it's got to be a real company making real money. And it's got to be something we have confidence can be accretive in the first year of acquisition. It's too stressful otherwise.

Life's too short, so we try to make sure they're good acquisitions. And there's not a lot of them out there, but we do look at a lot and we sift through a lot of different opportunities. And if we can find something that is accretive and strategically on point, well then we would pull the trigger on it.

Got it. When we calculate the adjusted EBITDA, if you were to add back those elevated expenses of this year of $11.4 million and using your current guidance, you get to something around 23.5% EBITDA margin, which is an increase of about 150 basis points from last year. Is that versus that correct?

And then second, is as we go forward how should we think about from an EBITDA margin expansion potential?

Hey, it's Mark. That is roughly the way to think about it, and yes, we do believe on a carry-forward basis we will have expanded EBITDA margins that reflect the benefit you would have seen this year had we not had those one-time costs.

Can you quantify the size going forward? Is there a target of how much operating margin improvement you're looking at per year?

Great question. No, we can't. The reason is it would have the effect of accidentally guiding future periods. But we certainly believe that the margins can be better. And we are striving for cost controls to make them even better. And we've always said, even going back to the old days that our normalized margin for the Company should be something that starts with a two. I've said that many times.

We didn't always hit it. We had some difficult years, especially when MoneyPak was pulled off the shelf. And we have the new products we rolled out of Walmart a few years back. And we missed it. We were in the teens and that's not acceptable. But we're now comfortably back in the 20%s and we want to keep moving more in that direction.

Got it, thanks. I just had to ask that question.

I don't blame you and I'm glad you did. We'll guide the year next year and we're going to work as hard as we can to keep it going.

Good quarter, guys, thanks.

Thank you very much.

Ashish Sabadra, Deutsche Bank.

Hi, good quarter, pretty solid momentum and revenues. My question was more on the operating metrics. I understand the active cards being under pressure but even when I look on a sequential basis, the sequential decline has been more than what we've seen prior to 2015. When we think about it, it's a combination of accretion and new card activation.

Can you let us know have you seen a more recent attrition and pick-up in new card activation? How should we think about those going forward, both attrition as well as activations?

Right. So the answer is attrition, better. Activation, not better. New card sales, we'll see. Here's how we think about that.

If you look at Q1, we were negative 11% year over year, Q2 we were negative -- help me out, guys -- 10% year over year. And this quarter negative 9% year over year.

So the comp is getting slightly better, but to your point, not by leaps and bounds. But it's not getting worse, it's getting better. And so we look at that.

But it's mutually exclusive -- not exclusive, but it's an opposite metric. The more you have retention and the more customers buy your cards and instead of buying them, throwing them away, buying them, throwing them away, they're buying them and keeping them. We start the fee when you get the product. It has all these features, it has cash back.

So you have, if you look at reloading customers on a year-over-year basis, that's flat year over year. If you look at it in direct deposit customers in the year-over-year basis, that's up year over year.

So the actual core underlying portfolio that generates the revenue looks very, very strong. Where you see the differences is that you don't have that one-and-done churn behavior that we have had for so many years by design. That was part of the design of the new category.

So it used to be you'd do a focus group, for example, and you'd say, do you like Green Dot? Oh, I love Green Dot. And so you'd say, how long have you had your card? Oh, well, I buy them 10 times a year, that's why I love Green Dot, I buy them all the time.

So the customer thought of retention as I buy a card every month or I buy a card whenever. Now we've changed it to don't do that, buy the card, keep it, reload it and here's reasons to do that. There's cash back or now you can deposit checks, now you can write a check to pay your rent. It's a different kind of customer.

And I think between those features and services, combined with just a natural main-streaming of the product, you don't need to buy 10 cards a year. So it isn't that we're failing or doing something wrong by controlling that acquisition pipe, it's part of how we're saving so much money and carving out so much EBITDA, is when you acquire a new customer who stays for only a couple of days, you've either broken even or lost money on that guy. It's just not a helpful thing to model. When somebody buys a card and keeps it longer, that's a great thing for the model.

So what you're seeing is that moderation and that switching of the casual one-and-done customer which had the impact of puffing up your active card numbers, can now more normalize committed active customer base. And it's going to take some time for that to level out. So having said that, we certainly want to acquire more customers. We just want to acquire the right kinds of customers, and we're getting better at doing that.

That's great, thanks for the color. Quickly on the activation itself, also on MoneyPak, you've seen some good traction on MoneyPak roll-out at 12,000 locations. You have 13,000 coming up in first quarter 2017.

So as MoneyPak gets rolled out, does that also help you on the card activation front? Is there any correlation there?

We don't know. It's too soon. We like to think so, but it's hard to know because these roll-outs are fairly recent. CVS and Dollar General just rolled out in the last few weeks, so it's hard to know for sure.

But we think overall it can make the category bigger again. And then, and I alluded to this in the prepared remarks portion of today's call, and then the key is to come up with some really unique killer apps for MoneyPak that marries some of the cool technology we have in the Company to make MoneyPak worth something more than it was before. So there's a lot of innovation we think is still to come on that product.

But it's gone well so far. There's been a very good result on stopping the fraud and the nefarious activity, which is a really important thing for us. And the retailers are excited about carrying it again which is a wonderful thing. So we'll see how it matures over time.

That's great. My final question, direct deposit has been growing at a very rapid pace and you talked about all the steps are taking. Can we expect that growth to sustain going forward?

I think it can. A common meeting that I would be in would be a marketing meeting and a stack meeting with our consumer accounts division run by a very talented GM named Mike Keeslar. I'm constantly talking about all the ways that we can make it far easier and more intuitive to enroll in direct deposit.

Enrolling in direct deposit for you or me or anybody is not particularly easy. Even if you're using Chase or something, you have to go online and print out a form and fill it out and take it to your HR clerk. And every fiber of my body seems to think that can replaced by something more modern and more intuitive for a mobile-based customer.

So we are always working on new ways to do that and, frankly, I think we are just getting started with it. So it's hard to know how those plans will roll out, but I feel confident that we can continue to grow that penetration.

Thanks again, good quarter.

Thank you very much.

Andrew Jeffrey, SunTrust.

Hi, guys, thank you for taking the question. Appreciate it.

You bet.

A couple things. One, I wonder if you could give us a little clarity on what's driving those higher-than-expected fees on ATMs and purchase transactions. I understand the transaction component. I guess that's a good thing. What is the fee input there?

The answer is that we had a fee increase from one of our network partners which, as you may know from covering VISA MasterCard and some of the ATM networks, they have them on an automatic basis. And this is one happened to us and we need to have a better negotiation.

I'd like to give you a better or more elaborate answer to that, but the combination of higher fees that went into effect automatically on some dates certain at the network, combined with the usage of payday ATM transactions increasing with direct deposit penetration and more committed customers. It all ties together while (technical difficulty). That's all renegotiated we've started and we need to finish that job because it's a big variance and not acceptable to have that going forward. So we need to work with all of our network partners to make sure that we are getting a good deal.

Okay, fair enough. Also a little color on the receivable write-off, if we could get it, is that a real one-off? Is that something that is normal course or just a little more (multiple speakers).

(multiple speakers) ever reported something like that. It's $1.5 million and it became clear that we weren't going to collect it and so just take the write-off now and move on with it. If we can get later, great, just take the write-off and move on. But that was a real one-off situation it could have been in any quarter. This is from a prior period but we decided to take the write-off this period.

Okay. And then one last quick one, if I may. With regard to scale, processing costs were little bit higher than what we were looking for this quarter. And you're obviously spending against some growth initiatives.

I heard your comments early on margin, Steve. When you look out at spend, as well as processing scale, is there some point in time where we move past some of the elevated expense levels and get more consistent quarterly operating leverage? Is that a 2017 event or is it too early to put a line in the sand like that?

When you back out the one-time badge in the quarter and look at a more normalized run rate, the expansion's been strong. So we like where we are at. A lot of noise in processing this quarter. Between the increased fees from the payment networks and more ATM usage, while that doesn't sound like a big deal, it became a big deal and so we have to negotiate that.

I think on the other side is a conversion from our former processor, as you know, to MasterCard TPS. We need to complete that conversion so we can take advantage of those normalized fees. Until then, we're feeding two mouths, in effect, as part of that. 2017 should see some normalization of that.

Nevertheless, despite absorbing all stuff, we're doing okay but we would expect the margin expansion to be something greater than it is today. And looking out those costs is something that we're maniacal about because you have to make those changes. It's tough for an organization. We're not a young business anymore. We are 16 years old, 17 years old and we think of ourselves as a start up and we still operate many times with that mentality, which is a good thing on the business front and the technology front.

But it's a big Company and to cut out the level of expenses we're looking to cut out, requires reengineering and working with a lot of team members. And people don't like change, that's reality of it.

So it's a very deliberate process of getting wonderful employees and talented people to understand that technology can do things today that it couldn't five years ago and that these things move on. We have so many long-term employees at Green Dot that all these things take time to work through. But we think we have a lot of leverage still to come with margin expansion.

Okay, thanks so much.

You bet, thank you.

Matthew [Gogle], Morgan Stanley.

Hi, thanks for taking my question. Steve, I wanted to ask again about the six-step plan that you guys have. It's good to hear you reiterate that guidance and add at least $175 million next year.

It's obvious that the biggest driver to that is the better economic product that you've launched. But if you think about the remaining five, could you help us rank them in order of contribution to your EPS goal for next year?

Gosh, they are all important and when you roll out new products, and I've said this many times over the years, it would be intellectually dishonest to say that you know they're all going to be a hit or not. So you have initiatives in each one of those steps. Some we highlight on different calls and different initiatives.

And you know before the -- not every child's going to grow up to be the President. And that's a very appropriate thing to discuss today. But you don't know which of your kids are going to grow up to be the President. And so you take a thoughtful approach to launching products, knowing that some will make it and some won't, you know?

They are all important divisions. The credit division, with secured credit card and Green Dot Money and those initiatives and other we'll roll out over time, to me have a lot of promise. So we have to nurture those along and make sure we roll them out smartly until they can get to scale and contribute. Our legacy businesses is always going to be a big driver.

Out Green Dot Direct division, which we didn't even have a few years back, has turned out to be a really important driver. More people go online to buy cards, they shop online to buy the card. They expect the mobile first experience I mentioned my prepared remarks 70% of all the hits to GreenDot.com and WalmartMoneyCard.com, AccountNow.com, AchieveCard, GoBank, all of our internet brands, are from a mobile phone, not even from a desktop or a laptop.

And we have to invest in all these things cautiously, knowing that some will hit and some won't. So I hate to rank order them except to say that in every division there's important things.

If you look at the one that has the most activity today, besides cards the division, it'd be Helena Mao's division, who's a 15-year Green Dot employee and one of our better GMs. She runs the money processing division. In that division, which suffered all the battles of MoneyPak and all that stuff last year and the year before, is now the division that has the Uber account and is coming up with all the money processing stuff and all those exciting new technologies to serve an entirely new segment that didn't exist four years ago.

So that's why you plant these seeds. If we had not built that technology, and if we had not put our foot down and said we will become a mobile fin-tech leader come hell or high water three years ago, four years ago, in 2012 starting with the purchase of Loopt, we would've been lost the dust today as a Company. Instead, we have this whole line of business activity in Helena's group on top of he card group.

So you never know. You take your risks and you bets. You try to do it thoughtfully and cautiously, knowing that some will work and some won't. And so we have optimism for all those six steps in all those divisions.

Great. That's helpful and I guess, following up on online comment that you made, can you tell us what percentage of your customer acquisition today is coming online versus through the retail channel?

I can't. We have account segments services division which includes our consumer accounts division, all the retail cards we sell and checking accounts. And then we have our Green Dot Direct division which is part of consumer accounts, so we don't break it out.

Unfortunately I can't because it all looks the same on the income statement. They're all the same products we're selling, just through different channels. But it's an important channel to have and one we're continue to invest more money.

Got it. One broader question on the adjustable market and the growth opportunity. As you think about your total addressable market of under bank consumers, what does the adoption rate of fee-based cards look like today and how are you thinking about the remaining runway for growth.

I'm sorry. The last part, the remaining what?

Runway for growth. How much of your opportunity remains untapped and how you're feeling about growth in 2017 and beyond.

We think there's a large addressable market untapped for prepaid or lower-moderate income. But increasingly you're seeing it divided by age, much like the election, if you look at the election map to be age turned out to be the difference of who voted which way, as opposed to economics. And we're seeing something interesting develop with our products that increasingly is an age thing.

We have got to continue to make sure that we are a technology Company first, married to a really awesome bank charter. That combination has turned out to be very strong for us. And we want to do more with that as we have commitment relief and able to use our bank for more exciting things.

So we think there's a big opportunity. But to do it, we need to make sure our products are relevant to younger people. And that's where a lot of the effort is. Because if you look at the new money transfer services and the things that young people use, young meaning under 35, is that it isn't that Green Dot's competition may be from NetSpend or from American Express Server. Those things are fairly well-known and worn through at this point. And they are what they are and we are what we are.

The question is, how do you compete with Venmo? How do you compete with Square Cash? How do you compete with whatever services may be out there from companies that today don't exist, that some kid in a garage somewhere is building that won't launch for two years and suddenly makes checking accounts look stupid?

And so these are all the things that we're focused on. We have to make sure we are hitting our numbers today, which as you know we are working hard to do, but at the same time make sure we never forget that the future is about innovation and about younger people coming into the banking segment for whom walking into a branch does not make sense or filling out an application or this kind of thing.

And it's about how does that consumer meet our product at a retail store where they are going every day? How do they meet our product online? How do they see it on the Steve Harvey show? How do they find it on a mobile app? And how does that product speak to them in a modern voice that they understand?

And that's really where our opportunity is. If we can't get there, we are not going to have a long runway of growth. I think we can I think we will, but that's why we've made the investments over the years we've made.

Great, thanks a lot.

You bet.

Reggie Smith, JPMorgan.

Hey guys, thanks for taking my question. I was trying to read through between the lines. You talked about bank capital requirements possibly coming down. You mentioned acquisitions.

I think you also talked about possibly investing in some, what sounds like higher-yielding assets. And I'm curious how far up the risk curve are you guys thinking? Am I hearing it correctly?

And then two, how far up the risk curve are you guys -- what might these products be? Is this lending to consumers, is it would you be invested in it?

The truth is -- first of all, Reggie, as always you have great questions and tell [Tinjan] I said hello as well. And the answer is even though I'm an entrepreneur, I'm a chicken when it comes to risk with money. And so when we think about bank, it's a well-capitalized bank, it's a well-run bank. We pride ourselves on trying not to be overly aggressive and stupid with how we run things, on any of our business lines.

When you think about risk, today we're invested in only cash and cash equivalents at the bank, which yields, if we're lucky, I don't know, I'm going to make 40 basis points, something like that, a year. So not exactly a flame-throwing investment.

If we have the ability to invest that in a more appropriate mix of long- and short-duration investments, very, very high-quality investments, low-risk investments, you'd still get 1.5% or 2% or something like that, right? So I think you can have the balance of both a tripling or quadrupling return on your uninvested capital, but still be incredibly safe and relatively liquid and all those kinds of things, in terms of how you invest in cash.

As you think about credit products, we do believe we have a great opportunity to look at credit as a way to enhance both why people buy a Green Dot card product or a checking account product, how we can to help build people's credit so they can have a better credit rating and bureau report down the road. And also so we can make more money on our assets.

But to do that with our customer segment, I always have to be -- and I've said this before, Mary Dent is the new CEO of our bank and doing a wonderful job. We need to be honest that low-income people sometimes, or moderate-income people can't pay you back, not because they're bad people, they're wonderful people and we love them and then a large part, frankly many of our lives in Company who do a lot of volunteer service, are dedicated to serving that constituency. But they can't always pay you back. One medical bill or a bad muffler and your month is shot, right?

So we have to recognize that as we come up with credit programs. How do you come up with a credit program that on one hand provides enough liquidity to matter? It can't be where you're making $20 on a loan or something, it's got to be enough liquidity that it matters to the customer. But done in a way where you can feel certain you'll get paid back in a way the customer can afford to pay you back without all kinds of predatory fees and penalty fees, which as you know, is not something that Green Dot does. And how do you make that all work?

We think we have some good ideas to do it. And having a bank charter and having capital and a healthy balance sheet puts us in a position to that, I think, better than almost any Company in our space. And with all new payday lending rules and all the things that are out there, we think we have a real opportunity.

But your point on the risk curve, it's always going to be somewhat muted and moderate because it's just -- the honest answer is that a company in many ways good and bad, reflects its founder and CEO. And I just don't have a high risk tolerance for losing money. So that's going to likely reflect the decisions we make.

Understood. A follow-up to that, I think last quarter you said that you started the Lending Place business and the acceptance rates were kind of low. It sounds like you've added some more lenders. Curious what are you seeing there from the acceptance perspective? And I had one last follow-up, if that's okay.

Right. We've added more lenders and all of them are increasingly reading like a Who's Who of that space. But we're not yet seeing the uptake in credit acceptance. Part of that is because, as we talk to our credit partners, they're tightening up their credit straps in terms of who they give loans to, as they're not always sure about their ability to find money to lend and what the charge rates can be on a new service. Some of them have come back and asked us to juice up the underwriting data that we provide with that application to allow them say yes more often.

So the answer is it's probably better than it was, but not at a rate that's going to be material. The GM who runs that division for us, a fellow named Richard King, is continually working on how to make that better and how to get the underwriting such that more people feel comfortable saying yes.

On the secured credit card side, that's actually going better than we had thought at this stage of the game. It's still very small but a tremendous number of applications. Many of them are qualified to get the card. We still have to, under regulation, have the ability to repay test when they fill out the application and we do that.

We need to make sure we are compliant with all the underwriting standards, which we do. And they're getting approved and then we send the card out and then they need to go make a security deposit at Green Dot Bank using our Green Dot reload network at retailers nationwide, to get the card started. And they are doing it. So that's one that has some promise to it.

Like I said to one of the previous callers, you never know which is going to grow up to be the big success. But we have a lot of hopes for all of them. That's how we are doing on credit so far.

One last one. You made the point that you like the fact that your direct deposit customers are people that walked in, bought a Green Dot card, signed up for direct deposit. And they tend to be stickier and more committed to the product.

Curious if you guys reconsidered what's your view on being a payroll card, maybe working directly with employers. Obviously you got the Uber relationship, but possibly expanding that.

Reggie, good question. We think it's a good channel and the answer is we always look at ways to get into that business but we understand it's also a lower-margin channel, and that's fairly well understood by most. And the retention is lower and the dollars loaded is lower. But in terms of low-cost acquisition, if you sign up a company that's doing or a group of companies that's issuing payroll cards, it can be profitable.

So it is at channel we look at and those are some the acquisitions we look at when we are trying to evaluate what we might buy that's accretive. If there's a payroll card company that's out there, that's great.

But increasingly it's my view that the concept of a payroll card is going to be replaced by disbursements that companies give to workers, end of story. And the act of enrolling the payroll card and having to do all kinds of integrated IT and comply with 8 million different state laws on payroll cards and what you can charge in this state but not that state, to me there's got to be a simpler way. And so we have a number of projects to be disruptive in that space. We think we have some good opportunities, like what we're doing with Uber, but in other parts of the Company that we're rolling out that we haven't yet discussed publicly.

So we like the business of paying workers their money. We like that a lot. We don't like as much the payroll card, as it's been known over of the past 15 years. Having said that, if you're a good-sized payroll card company, you're at scale, you're profitable, that doesn't mean we may not try to enter that business.

Perfect. Thank you. Congratulations.

You bet, Reggie, thank you.

Mike Grondahl, Northland Securities.

Actually it's actually Michael on for Mike. Thanks for taking my questions. First off, wondering if you expect any seasonality coming from the holiday promotions at large retailers that stand out, if there's anything there.

I'm sorry, your voice got a little -- If we see anything coming from, then say the rest again.

If there's any seasonality from holiday promotions at the large retailers, if any of those stand out.

You mean, will there be in Q4 or in Q3?

Q4.

We don't know yet but we are doing the Steve Harvey $5,000 Payday bonus, which is another way we drive direct deposit and that is Green Dot, we believe, is the best card for your payroll. When you think payroll, as Steve Harvey says, think payroll, think Green Dot. Because that's an opportunity for people to put their check on the card.

We give you early direct deposit. We're a bank that's FDIC insured, you're dealing directly with the bank, not through a third party. And there's a lot of other things we do. You can get cash-back rewards. We're always trying to come up with reasons for customers to think of us as their payday card.

So we're doing those kinds of promotions and we're doing a big one in retail in our line, it's for all of our channels, and that rolled out maybe 30 days ago. So we will see how that does in Q4. But Q3, there would've been no seasonality. Q3 is actually, as you know, typically one of our lower quarters in terms of our annual seasonality. So it is what is it is, there's no promotion in Q3.

Got you. That's helpful. And then one last quick one. Are there any big changes in the process or migration project since the last call? Or is that same expectations there?

We mentioned in, I forget where, either the Q or the earnings release, or the prepared remarks, or all three, somewhere, that we're looking at first half of next year for the finish of the conversion. And we're on track to do that. I think TSYS in the earnings call made the comment that it was in second quarter which was a fair comment. And so we've got to get that done.

That's one where we were always cautious and always slow-moving and always risk-averse. Now we're really cautious and really slow because that was such a unpleasant experience to have those 30,000 or 40,000 cardholders have their service disrupted. We don't want to have that happen again. So we're really taking our time.

MasterCard has been a good partner in working through those technology builds with us. Our team's done a fabulous job of looking at everything from soup to nuts. So we will get around to it and do that. In the meanwhile, we keep chugging along

Great.

By the way, while I'm on the topic, because I never get to say this, I want to thank TSYS. Listen, Troy Woods, Bill Pruitt and the folks who run that process here are people I've known for 15-plus years. They were with me when I started the Company in 17 years, were my first processor, and they still process half our Company today.

They have been really stand-up guys with this whole situation. They could have been, frankly, jerks if they wanted to be. They weren't. They've been helpful, they continue to be helpful. And I never get to say that publicly.

Despite whatever competitive issues NetSpend and Green Dot have had for 15-plus years, as a processor, TSYS has been a stand-up company. I want to thank Troy and Bill publicly for them being real, as we say, mensches, which will be a funny thing to say in Columbus, Georgia

Okay. (laughter) just disconnected at that point. Operator, I don't see any more names on the list. Are there any more to go?

There are no more questions at this time.

Okay. Well thank you, everybody, for tuning in. We appreciate your interest and have a wonderful day.

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