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NetSpend Holdings, Inc. Reports Third Quarter Financial Results

1 The number of active cards as of September 30, 2012 was approximately 2,287,000 as compared to approximately 2,061,000 as of September 30, 2011.

2 Reconciliations of Adjusted EBITDA and Adjusted Net Income to net income are provided in the tables immediately following the condensed consolidated statements of cash flows. Additional information about the Company’s non-GAAP financial measures can be found under the caption “Non-GAAP Financial Information.”

               

NetSpend Holdings, Inc.

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(in thousands, except per share data)
 
Operating Revenues $ 84,893 $ 74,324 $ 261,620 $ 229,493
 
Operating Expenses
Direct operating costs 39,559 34,483 126,423 110,105
Salaries, benefits and other personnel costs 13,770 12,858 41,731 40,579
Advertising, marketing and promotion costs 4,726 3,261 13,623 10,993
Other general and administrative costs 5,562 5,320 16,071 15,623
Depreciation and amortization 3,107 3,794 10,289 11,234
Other losses   10,300     324     37,148     324  
Total operating expenses 77,024 60,040 245,285 188,858
 
       
Operating income 7,869 14,284 16,335 40,635
 
 
Other Income (Expense)
Interest income 39 28 109 78
Interest expense   (580 )   (489 )   (1,827 )   (1,494 )
Total other expense (541 ) (461 ) (1,718 ) (1,416 )
 
       
Income before income taxes 7,328 13,823 14,617 39,219
 
 
Provision for income taxes 2,931 5,513 5,846 15,550
 
       
Net income $ 4,397   $ 8,310   $ 8,771   $ 23,669  
 
 
Net income per share of common stock: (1)
Basic $ 0.05 $ 0.09 $ 0.10 $ 0.26
Diluted $ 0.05 $ 0.09 $ 0.10 $ 0.26
 
Shares used in the computation of earnings per share:
Basic 71,545 82,947 74,702 86,513
Diluted 82,696 89,415 85,661 92,133
 
(1) - Net income used in the calculation of basic and diluted earnings per share is adjusted for amounts unavailable to common stockholders. Our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 will contain a further reconciliation of this number for the three and nine months ended September 30, 2012 and 2011.

       

NetSpend Holdings, Inc.

Condensed Consolidated Balance Sheets

As of September 30, 2012 and December 31, 2011

 
September 30, December 31,
2012 2011
(Unaudited)
(in thousands of dollars)
Assets
Current assets
Cash and cash equivalents $ 26,391 $ 72,076
Accounts receivable, net of allowance for doubtful accounts of $1,111
and $581 as of September 30, 2012 and December 31, 2011,
respectively 10,454 7,552
Prepaid card supply 3,675 2,000
Prepaid expenses 3,740 3,326
Other current assets 1,808 2,179
Income tax receivable 2,409 -
Deferred tax assets   13,555   4,138
Total current assets 62,032 91,271
 
Property, equipment and software, net 24,192 20,631
Goodwill 128,567 128,567
Intangible assets 20,680 22,227
Long-term investment 4,850 2,497
Other assets   17,672   7,549
Total assets $ 257,993 $ 272,742
 
Liabilities & Stockholders' Equity
Current liabilities
Accounts payable $ 8,667 $ 3,183
Accrued expenses 24,215 20,937
Income tax payable - 1,733
Cardholders' reserve 4,627 3,892
Deferred revenue 1,680 1,585
Current litigation contingencies   35,175   -
Total current liabilities 74,364 31,330
 
Long-term debt 70,000 58,500
Deferred tax liabilities 7,632 7,431
Other non-current liabilities   5,164   4,628
Total liabilities   157,160   101,889
 
Total stockholders' equity 100,833 170,853
   
Total liabilities & stockholders' equity $ 257,993 $ 272,742
 

   

NetSpend Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 
September 30, September 30,
2012 2011
(in thousands of dollars)
 
Cash flows from operating activities
Net income $ 8,771 $ 23,669
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 10,289 11,234
Amortization of debt issuance costs 244 244
Stock-based compensation 8,471 8,832
Tax benefit associated with stock options (1,168 ) (1,208 )
Provision for cardholder losses 13,354 10,489
Deferred income taxes (9,418 ) (1,657 )
Change in cash surrender value of life insurance policies (119 ) 55
Litigation contingencies, current 35,175 -
Changes in operating assets and liabilities
Accounts receivable (2,902 ) (1,314 )
Income tax receivable or payable (2,974 ) 284
Prepaid card supply (1,675 ) (266 )
Prepaid expenses (414 ) (566 )
Other current assets 371 (969 )
Other long-term assets (9,759 ) (1,161 )
Accounts payable and accrued expenses 8,762 (4,190 )
Cardholders' reserve (12,619 ) (11,896 )
Other liabilities   631     1,046  
Net cash provided by operating activities   45,020     32,626  
 
Cash flows from investing activities
Purchases of property, equipment and software (11,989 ) (6,808 )
Long-term investment (1,095 ) -
Premiums paid on cash surrender value life insurance policies (489 ) (862 )
Other   (314 )   (12 )
Net cash used in investing activities   (13,887 )   (7,682 )
 
Cash flows from financing activities
Dividend equivalents paid - (353 )
Proceeds from the exercise of stock options 3,073 944
Proceeds from the re-issuance of treasury stock under employee
stock purchase plan 351 -
Tax benefit associated with stock options 1,168 1,208
Issuance costs of public offering - (95 )
Proceeds from issuance of long-term debt 80,000 -
Principal payments on debt (68,500 ) (3,303 )
Treasury stock purchase (92,559 ) (25,065 )
Tax withholding on restricted stock   (351 )   (661 )
Net cash used in financing activities (76,818 ) (27,325 )
   
Net change in cash and cash equivalents (45,685 ) (2,381 )
 
Cash and cash equivalents at beginning of period   72,076     67,501  
Cash and cash equivalents at end of period $ 26,391   $ 65,120  
 
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,431 $ 1,714
Cash paid for income taxes 18,253 16,838
 
Non-cash investing activities:
Capital lease entered into for the license of software $ - $ 1,949
 

           

NetSpend Holdings, Inc.

Reconciliation of Adjusted EBITDA to Net Income

For the Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 
Three Months Ended Nine Months Ended
September 30, September 30,
2012     2011 2012 2011
(in thousands of dollars)
 
Net income $ 4,397 $ 8,310 $ 8,771 $ 23,669
 
Interest income (39 ) (28 ) (109 ) (78 )
Interest expense 580 489 1,827 1,494
Income tax expense 2,931 5,513 5,846 15,550
Depreciation and amortization   3,107     3,794     10,289     11,234  
EBITDA 10,976 18,078 26,624 51,869
 
Stock-based compensation expense 2,779 2,871 8,471 8,832
Other losses   10,300     324     37,148     324  
Adjusted EBITDA (1)(3) $ 24,055   $ 21,273   $ 72,243   $ 61,025  
 
       

NetSpend Holdings, Inc.

Reconciliation of Adjusted Net Income to Net Income

For the Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 
Three Months Ended Nine Months Ended
September 30, September 30,
2012     2011 2012     2011
(in thousands of dollars, except percentages and per share data)
 
Net income $ 4,397 $ 8,310 $ 8,771 $ 23,669
 
Stock-based compensation expense 2,779 2,871 8,471 8,832
Amortization of intangibles 446 881 1,861 2,643
Other losses   10,300     324     37,148     324  
Total pre-tax adjustments 13,525 4,076 47,480 11,799
 
Tax rate 40.0 % 39.9 % 40.0 % 39.6 %
Tax adjustment   5,410     1,626     18,992     4,677  
 
Adjusted net income (2)(3) $ 12,512   $ 10,760   $ 37,259   $ 30,791  
 
Adjusted net income per share:
Basic $ 0.17 $ 0.13 $ 0.50 $ 0.36
Diluted $ 0.15 $ 0.12 $ 0.43 $ 0.33
 
Shares used in the computation of adjusted earnings per share:
Basic 71,545 82,947 74,702 86,513
Diluted 82,696 89,415 85,661 92,133
 
(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 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, losses on the early extinguishment of long-term debt and other infrequent losses;
  • 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; and
  • We use it to evaluate our capacity to incur and service debt, fund capital expenditures and expand our business.

Other losses of $10.3 million during the three months ended September 30, 2012 and $37.1 million during the nine months ended September 30, 2012 primarily relate to accruals for legal contingencies and settlements. Other losses of $0.3 million during the three and nine months ended September 30, 2011 primarily relate to severance costs incurred in connection with the consolidation of some of our processing platforms and call center activities.

(2)   In addition to Adjusted EBITDA, we use a second non-GAAP financial metric that we label "Adjusted Net Income" to evaluate our financial performance. We compute Adjusted Net Income by adjusting net income or net loss to remove tax-effected amortization expense, stock-based compensation and other non-recurring gains and losses. We believe that Adjusted Net Income is an important metric that is useful to our board of directors, management and investors for the following reasons:
  • Assets being depreciated will often have to be replaced in the future and Adjusted EBITDA does not reflect any expenditure for these items;
  • Adjusted EBITDA does not reflect the significant interest expense or the payments necessary to service interest payments on our debt;
  • Adjusted Net Income 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, losses on the early extinguishment of long-term debt and other infrequent losses;
  • Adjusted Net Income per share on a diluted basis functions as a threshold target for our company-wide employee bonus compensation; and
  • We believe Adjusted Net Income measurements are used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry.

Other losses of $10.3 million during the three months ended September 30, 2012 and $37.1 million during the nine months ended September 30, 2012 primarily relate to accruals for legal contingencies and settlements. Other losses of $0.3 million during the three and nine months ended September 30, 2011 primarily relate to severance costs incurred in connection with the consolidation of some of our processing platforms and call center activities.

(3) By providing this non-GAAP financial measure, together with the above reconciliation, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives. Our Adjusted EBITDA and Adjusted Net Income are not necessarily comparable to what other companies define as Adjusted EBITDA and Adjusted Net Income. In addition, Adjusted EBITDA and Adjusted Net Income are not measures defined by U.S. GAAP and should not be considered as substitutes for or alternatives to net income, operating income, cash flows from operating activities or other financial information as determined by U.S. GAAP. Our presentation of Adjusted EBITDA and Adjusted Net Income should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.




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