NetSpend Holdings Sees Prepaid Debit Card Sales Rise

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If last decade's financial crisis proved anything, it's that certain people have no business borrowing large sums of money.

This was brought into clear focus by the large number of homeowners who got approved for mortgages only to find they couldn't handle the payments.

In the years since, the credit markets have undergone a major shift. Banks are much more careful about issuing loans and extending credit. Many former homeowners are now renters, and many former credit card holders must find others ways to buy things with plastic.

For the latter group, one option is to get a prepaid debit card like those offered byNetSpend Holdings ( NTSP ).

NetSpend provides general purpose reloadable ( GPR ) prepaid debit and payroll cards and other products and services to consumers in the U.S.

The company's GPR cards offer access to FDIC-insured depository accounts with pricing and features tailored to underbanked consumers. It is the nation's second-largest provider of GPR prepaid cards in the U.S. based on active cards and gross dollar volume loaded.

Load The Cards

Prepaid cards work like debit cards in that users can only spend the amount of money they've deposited into their accounts. The difference is, prepaid card users don't have to open a checking or savings account. They simply load the cards with money and begin using them to make purchases and pay bills. Customers don't need a credit history to get the cards, either.

NetSpend's distribution network lets consumers buy and reload prepaid debit cards at more than 100,000 locations, including retailers, check cashing outlets, convenience stores, grocery stores and insurance providers. Users can also load money from their PayPal accounts onto their NetSpend cards.

In addition, NetSpend provides corporate payroll card products that let employers deposit money straight into employees' card accounts.

NetSpend has produced steady revenue growth through the years thanks to efforts to expand its distribution network and product offerings. It has been particularly aggressive at widening its footprint in retail locations, analysts say.

"The company has made a big retail push and signed new contracts with several larger retailers, which should boost the number of (retail) locations selling its card to 45,000 by year end, up from 30,000 currently and 8,000 last year," John Kraft, an analyst at D.A. Davidson, noted in a report following NetSpend's third-quarter earnings report.

He says only 7% of NetSpend's current revenue comes from the retail channel, "providing plenty of room for growth." NetSpend continues to tap into the market by inking deals with large and well-known retail brands.

During the third quarter, it signed an agreement withWalgreen ( WAG ) to sell PayPal cards at its retail locations. It also signed an agreement withCVS ( CVS ) to launch the sale of NetSpend and PayPal prepaid cards at its retail locations.

In addition, NetSpend announced a multiyear agreement with financial software firm Intuit to provide prepaid card services for Intuit's TurboTax and QuickBooks products.

With that deal, NetSpend will offer its prepaid cards to Intuit's 24 million TurboTax customers and 1 million small-business QuickBook users for the upcoming tax season.

Analysts give NetSpend high marks for its ability to move into new, potentially lucrative areas.

"We continue to view NetSpend as the best-positioned player in the prepaid space given its diversified distribution channel approach and good deal momentum," said Ashwin Shirvaikar, an analyst at Citigroup.

In addition to expanding its roster of retail locations, NetSpend also is expanding its product lineup. Among other things, the company plans to launch a new feature, called mobile minutes, which will be available free to its cardholders.

The feature lets users instantly add minutes to their prepaid mobile phones through a simple text message. The top-up amount will be debited from the NetSpend account in real time. Cardholders will get a dollar back for each top-up transaction.

Customer Demand

The mobile phone feature was added as a way of meeting customer demand, says Gary Prestopino, an analyst at Barrington Research.

"According to management, mobile phone expenses represent one of the largest monthly expense categories for its customers with about 30% of NetSpend cardholders using prepaid phones," he noted.

NetSpend's growing lineup of locations and products has helped it produce three straight years of double-digit-or-higher sales and earnings growth.

The company is on pace to continue the streak in 2012 with earnings rising at least 18% and sales increasing at least 13% during the first three quarters of the year.

Earlier this month, NetSpend reported third-quarter earnings of 15 cents a share, up 25% from the prior year and a penny above Wall Street estimates. Revenue rose 14% to $84.9 million, in line with views.

Growth in the number of active cards accelerated to 9% during the quarter from 5% the prior year, led by a 25% gain in direct deposit accounts.

"The growing mix of direct deposit cards also helped drive strong growth in revenue per card (up 5%) and gross dollar volume (up 18%)," Shirvaikar noted.

Most analysts expect NetSpend's momentum to continue into the next several quarters. Those polled by Thomson Reuters look for annual earnings to rise 23% this year and 24% in 2013.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: CVS , GPR , NTSP , WAG

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