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Five Interesting Details from NetSpend's Earnings Report

Adam Rust's picture

Posted February 27, 2012

NetSpend released a very upbeat annual report on Friday afternoon. The filing says that net income was up almost 50 percent from last year. That's good news for NetSpend.

But is the company readying itself to be sold?

Here are some details:

Bad news - no new card growth: NetSpend says that the number of active cards - approximately 2.1 million - did not change over the last twelve months.

Good news - More of those cards have direct deposit: At the end of 2011, more than two of every five NetSpend cards was set up to receive a direct deposit. Just two years ago, only 27 percent of their cards were set up in such a manner. Getting customers to direct deposit their paycheck onto your card is a nifty trick because it usually means that profits will follow. Those direct depositors stick around for a longer time, they put more dollars on to the cards, and they make more interchange-generating transactions. Since direct deposit-enabled cards are used so much more often, this is a sign that makes up for the fact that they are not growing their customer base. This number says that people are becoming more and more comfortable in using the card as their primary banking instrument.

Not good or bad news - Gross Dollar Volume is growing, but not as quickly as in the past: Customers put $11.2 billion on to their NetSpend cards in 2011. That represents an increase of a bit more than 14 percent relative to 2010. This is a gain, but GDV had been up 28.9 year-over-year at the end of 2010.

Curious news - they are cutting salaries: Even though NetSpend is a growing company, they reduced their salary and wage expenses in 2011.

Good news - their day-to-day finances are solid: The current ratio at NetSpend was below 1.0 as recently as at the end of 2009. That is never a good sign. It signals that the company has more debt due in the next year than it has cash on hand to use to pay for that debt.  Now things are better. Their current ratio at the end of 2011 was almost three. Having loose cash creates a problem - you have to find something to do with that money. This is generally a good problem and one that can often put a growth company into overdrive.

Follow the money

Where is that cash going? Is it helping to put NetSpend into overdrive?

Not entirely. There were 2.1 million card holders at the end of 2010 and there were 2.1 million at the end of 2011.

A lot of this cash is leaving the company and going back to the shareholders. NetSpend has announced two separate stock buybacks. In 2011 they bought back $32.7 million in shares. That is a lot of buyback given that net income was only $33.25 million. Indeed, they had committed to buy back about $50 million in shares but they are going to push the rest of that back until 2012: in their 10-k, they indicate that they hope to use another $17.4 million in cash to buy back more shares.

This is not a sign that says that their investors are jumping ship. Two private equity funds do own about 55 million shares - or about 65 percent - of NetSpend's class a common stock, but getting their share of $50 million back out of the company is not a difference maker.  Those two firms - Oak Investment Partners and JLL Funds - have holdings worth about $510 million (today's prices) in the company.

Even so, it is an odd feint on the part of NetSpend. Growth companies usually put their cash back into the company. They use it to hire more bright people, invest in new ideas, or build out on their existing plans. The logic is that the managers think their company is so great that they are going to use shareholder dollars on their company, rather than encouraging owners to buy something else. NetSpend is not doing that. Sometimes people use cash to pay off debt, but that isn't what they are doing, either. Long-term debt was $58.5 million in 2010, and it was $58.5 million in 2011.

They are taking their cash back out of the company. What gives?