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NetSpend Holdings, Inc. Reports Fourth Quarter 2010 Results

Cautionary Note Regarding Forward-Looking Statements

This press release may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended, and Rule 3(b)-6 under the Securities Exchange Act of 1934, as amended. These statements include, among other things, statements regarding future events that involve risks and uncertainties. Actual results may differ materially from those contained in the forward-looking statements contained in this release, and reported results should not be considered as an indication of future performance. NetSpend cautions you that reliance on any forward-looking statement involves risks and uncertainties and that although NetSpend believes that the assumptions on which the forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be materially incorrect.  These factors include but are not limited to:

  • NetSpend's dependence on a limited number of distributors of its products;
  • increasing competition in the prepaid card industry;
  • exposure to cardholder and other losses;
  • NetSpend's reliance on its relationships with its issuing banks;
  • future actions against, or restrictions imposed upon, MetaBank by OTS;
  • regulatory, legislative and judicial developments in NetSpend's operations area;
  • changes in regulations impacting interchange fees;
  • changes in card association or network rules;
  • NetSpend's ability to protect against unauthorized disclosure of cardholder data;
  • fluctuations in customer retention rates;
  • general economic conditions;
  • NetSpend's ability to promote its brand;
  • NetSpend's reliance on payment processors and service providers;
  • changes in NetSpend's relationships with its issuing banks; and
  • NetSpend's ability to protect its intellectual property rights.

The potential risks and uncertainties that could cause actual results to differ from those projected are discussed in greater detail in NetSpend's filings with the Securities and Exchange Commission, including NetSpend's quarterly report on Form 10-Q for the quarter ended September 30, 2010, which are available on NetSpend's website at www.netspend.com and on the SEC website at www.sec.gov. All information provided in this release and in the attachments is as of February 24, 2011, and, except as required by law, NetSpend does not intend to update this information as a result of future events or developments.

About NetSpend

NetSpend Holdings, Inc., based in Austin, Texas, is a leading provider of general-purpose reloadable prepaid debit cards to underbanked consumers in the United States. NetSpend is one of the largest dedicated providers of GPR cards in the U.S., focused on providing the estimated 60 million underbanked U.S. consumers with innovative and affordable financial products. More information about NetSpend can be found at http://www.netspend.com .

The NetSpend Holdings, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=8154

1Reconciliations of Adjusted EBITDA and Adjusted Net Income to net income are provided in the tables immediately following the consolidated statements of cash flows. Additional information about NetSpend's non-GAAP financial measures can be found under the caption "About Non-GAAP Financial Measures."

NetSpend Holdings, Inc.
Consolidated Statements of Operations
Three and Twelve Months Ended December 31, 2009 and 2010
         
  Three Months Ended  Twelve Months Ended 
  December 31, December 31,
  2009 2010 2009 2010
  (unaudited) (unaudited) (unaudited)
  (in thousands, except per-share data)
         
 Operating Revenues   $ 59,402  $ 70,212  $ 225,000  $ 275,387
         
 Operating Expenses         
 Direct operating costs   28,992  35,402  106,572  130,783
 Salaries, benefits and other personnel costs   11,249  14,300  46,668  54,032
 Advertising, marketing and promotion costs   4,013  3,300  13,803  14,038
 Other general and administrative costs   4,865  4,369  22,074  18,234
 Depreciation and amortization   2,616  3,427  10,297  12,725
 Settlement (gains) and other losses   --   --   (10,229)  4,300
 Total operating expenses   51,735  60,798  189,185  234,112
         
 Operating income   7,667  9,414  35,815  41,275
         
 Other Income (Expense)         
 Interest income   1  19  32  85
 Interest expense   (1,105)  (543)  (5,170)  (3,526)
 Loss on extinguishment of debt   --   --   --   (734)
 Total other expense   (1,104)  (524)  (5,138)  (4,175)
         
 Income before income taxes   6,563  8,890  30,677  37,100
         
 Provision for income taxes   3,047  2,586  12,503  13,352
         
 Net income   $ 3,516  $ 6,304  $ 18,174  $ 23,748
         
Basic net income per share:        
Common stock   $ 0.04  $ 0.07  $ 0.21  $ 0.27
Class B common stock   $ 0.04  $ --   $ 0.21  $ -- 
         
Diluted net income per share:        
Common stock   $ 0.04  $ 0.07  $ 0.21  $ 0.27
Class B common stock   $ 0.04  $ --   $ 0.21  $ -- 
         
Shares used in computation of earnings per share        
Basic net income per share:        
Common stock   75,373  87,443  75,543  85,394
Class B common stock   10,043  --  10,112  --
         
Diluted net income per share:        
Common stock   76,318  93,353  86,733  88,991
Class B common stock   10,043  --  10,205  --
 
NetSpend Holdings, Inc.
Consolidated Balance Sheets 
As of December 31, 2009 and 2010
     
  2009 2010
    (unaudited)
  (in thousands, except share and per share data)
 
 Assets     
 Current assets     
 Cash and cash equivalents   $ 21,154  $ 67,501
 Accounts receivable, net of allowance for doubtful accounts of  $50 as of December 31, 2009 and $147 as of December 31, 2010   4,513  5,441
 Prepaid card supply   1,783  1,605
 Prepaid expenses   2,357  2,380
 Other current assets   1,845  1,007
 Income tax receivable   2,375  -- 
 Deferred tax assets   2,872  3,916
 Total current assets   36,899  81,850
     
 Property and equipment, net   24,441  21,007
 Goodwill   128,567  128,567
 Intangible assets   28,981  25,739
 Long-term investment   --   2,067
 Other assets   3,397  4,673
 Total assets   $ 222,285  $ 263,903
     
 Liabilities & Stockholders' Equity     
 Current liabilities     
 Accounts payable   $ 3,444  $ 2,850
 Accrued expenses   21,531  25,067
 Income tax payable   --   332
 Cardholders' reserve   1,620  4,789
 Deferred revenue   2,158  1,333
 Long-term debt, current portion   21,513  1,354
 Total current liabilities   50,266  35,725
     
 Long-term debt, net of current portion   51,979  58,500
 Deferred tax liabilities   10,318  9,855
 Other non-current liabilities   370  3,007
 Total liabilities   112,933  107,087
     
     
 Stockholders' equity     
 Common stock, $0.001 par value; shares authorized:     
 150,000,000 at December 31, 2009 and 225,000,000 at December 31, 2010; shares outstanding: 77,198,193 at December 31, 2009 and 91,540,381 at December 31, 2010   77  92
 Class B common stock, $0.001 par value, 15,000,000 authorized at December 31, 2009 and 2010 and 10,244,609 issued and outstanding at December 31, 2009   10   --
 Treasury stock at cost; shares held: 1,870,000 at December 31, 2009 and 3,370,000 at December 31, 2010   (5,704)  (11,374)
 Additional paid-in capital   119,484  150,183
 Accumulated other comprehensive loss   --   (1,142)
 Retained earnings (accumulated deficit)   (4,515)  19,057
 Total stockholders' equity   109,352  156,816
 Total liabilities & stockholders' equity   $ 222,285  $ 263,903
 
NetSpend Holdings, Inc.
Consolidated Statements of Cash Flows 
Year Ended December 31, 2009 and 2010
     
  2009 2010
    (unaudited)
  (in thousands of dollars)
Cash flows from operating activities    
Net income   $ 18,174  $ 23,748
Adjustments to reconcile net income to net cash provided by operating activities    
Depreciation and amortization   10,297  12,725
Amortization of debt issuance costs   476  424
Loss on extinguishment of debt   --  734
Gain on settlement   (1,192)  --
Stock-based compensation   4,484  7,268
Tax benefit associated with stock options   (18)  (1,520)
Provision for cardholder losses   4,930  10,254
Deferred income taxes   3,101  (1,505)
Changes in operating assets and liabilities     
Accounts receivable   1,037  (928)
Income tax receivable or payable   (203)  4,227
Prepaid card supply   396  178
Prepaid expenses   (654)  (23)
Other current assets   (826)  838
Other long-term assets   (1,754)  (972)
Accounts payable and accrued expenses   2,291  2,942
Cardholders' reserve   (4,629)  (7,085)
Deferred revenue   212  (825)
Other liabilities   73  2,637
Net cash provided by operating activities   36,195  53,117
     
Cash flows from investing activities    
Purchase of property and equipment   (14,616)  (6,045)
Purchase of intangible assets   (125)  (4)
Long-term investment   --  (3,210)
Net cash used in investing activities   (14,741)  (9,259)
     
Cash flows from financing activities    
Dividends paid   (5,000)  --
Dividend equivalents paid   (213)  (176)
Proceeds from exercise of common stock warrants   --  83
Proceeds from exercise of common stock options   125  851
Tax benefit associated with stock options   18  1,520
Net cash proceeds from initial public offering   --  20,981
Proceeds from issuance of long-term debt   9,000  58,500
Issuance costs of long-term debt   (361)  (1,462)
Principal payment on debt   (25,140)  (72,138)
Cash purchase of treasury stock   (219)  (5,670)
Net cash provided by (used in) financing activities   (21,790)  2,489
     
Net change in cash and cash equivalents  (336)  46,347
     
Cash and cash equivalents at beginning of year  21,490  21,154
Cash and cash equivalents at end of year  $ 21,154  $ 67,501
 
NetSpend Holdings, Inc.
Reconciliation of Adjusted EBITDA to Net Income 
For the Three and Twelve Months Ended December 31, 2009 and 2010
(Unaudited)
         
  Three Months Ended Twelve Months Ended
  2009 2010 2009 2010
  (in thousands of dollars)
Net income   $ 3,516  $ 6,304  $ 18,174  $ 23,748
         
Interest income  (1)  (19)  (32)  (85)
Interest expense  1,105  543  5,170  3,526
Income tax expense  3,047  2,586  12,503  13,352
Depreciation and amortization  2,616  3,427  10,297  12,725
EBITDA  10,283  12,841  46,112  53,266
         
Stock-based compensation expense  1,077  2,854  4,484  7,268
Settlement (gains) and other losses  --   --   (10,229)  4,300
Loss on extinguishment of debt  --   --   --   734
Adjusted EBITDA (1)(3)  $ 11,360  $ 15,695  $ 40,367  $ 65,568
NetSpend Holdings, Inc.
Reconciliation of Adjusted Net Income to Net Income 
For the Three and Twelve Months Ended December 31, 2009 and 2010
(Unaudited)
         
  Three Months Ended Twelve Months Ended 
  2009 2010 2009 2010
  (in thousands of dollars, except per-share data)
Net income  $ 3,516  $ 6,304  $ 18,174  $ 23,748
         
Stock-based compensation expense  1,077  2,854  4,484  7,268
Amortization of intangibles  786  881  3,516  3,245
Settlement (gains) and other losses  --   --   (10,229)  4,300
Loss on extinguishment of debt   --   --   --   734
Total pre-tax adjustments  1,863  3,735  (2,229)  15,547
         
Tax rate 46.4% 29.0% 40.8% 36.0%
Tax adjustment  864  1,083  (909)  5,595
         
Adjusted net income (2)(3)  $ 4,515  $ 8,956  $ 16,854  $ 33,700
         
Adjusted basic net income per share:        
 Common stock   $ 0.05  $ 0.10  $ 0.22  $ 0.39
 Class B common stock   $ 0.05  $ --   $ 0.22  $ -- 
         
Adjusted diluted net income per share:        
 Common stock   $ 0.05  $ 0.10  $ 0.19  $ 0.38
 Class B common stock   $ 0.05  $ --   $ 0.19  $ -- 

(1) We use a non-GAAP financial metric that we label "Adjusted EBITDA" to evaluate our financial performance. We compute Adjusted EBITDA by adjusting net income or net loss to remove the effect of income and expenses related to interest, taxes, depreciation and amortization, or EBITDA, and then adjusting for stock-based compensation, and other non-recurring gains and losses. We believe that Adjusted EBITDA is an important metric for the following reasons:

  • It provides a meaningful comparison of our operating results over several periods because it removes the impact of income and expense items that are not a direct result of our core operations, such as goodwill and intangible impairments, legal settlements and one-time settlement gains and losses on the early extinguishment of long-term debt;
  • We use it as a tool to assist in our planning for the effect of strategic operating decisions and for the prediction of future operating results;
  • It functions as a threshold target for our company-wide employee bonus compensation; and,
  • We use it to evaluate our capacity to incur and service debt, fund capital expenditures and expand our business.

Settlement (gains) and other losses during the twelve months ended December 31, 2009 relate to $9.0 million of recoveries of excess funds from our issuing banks for fee and chargeback recoveries and $1.2 million resulting from the settlement of certain litigation. Settlement (gains) and other losses during the twelve months ended December 31, 2010 relate to a $3.5 million loss related to a patent infringement dispute and a $0.8 million loss associated with a contractual dispute with a vendor.

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