This is an updated version of an article posted earlier.
Considering NetSpend Holdings Inc. swung and missed earlier this month in a court of law, the company at least has to feel good about making solid contact regarding its prepaid card numbers.
In CEO Dan Henry’s view, NetSpend during the first quarter “knocked the cover off the ball” in the retail prepaid card market.
Henry used the baseball analogy during a May 3 conference call to discuss the quarter’s earnings to emphasize that the provider of reloadable prepaid cards posted a 13% revenue increase from a year earlier.
Good thing, because the company needed the extra revenue to offset an unfavorable jury ruling stemming from litigation that has dragged on for nine years.
A Texas district court jury on May 1 awarded Raleigh, N.C.-based Alexsam Inc. $18 million in royalties from NetSpend stemming from a 2003 patent-infringement lawsuit, George Gresham, chief financial officer, told analysts during the call. Alexsam alleges that NetSpend violated two of its patents related to the technology that activates a prepaid card reload, he said.
The $18 million reward represents about 41% of what Alexsam originally sought, Gresham said. NetSpend plans to appeal the ruling, a process that could take up to two years. The amount of future royalties NetSpend might owe Alexsam remains unclear, he said.
Austin, Texas-based NetSpend posted $25.3 million in pretax litigation expenses for the quarter, so investors and analysts “can assess our operating performance against those losses,” Gresham noted.
Legal matters aside, the number of NetSpend cards tied to direct deposits rose to more than 1 million during the quarter, and the company now has 2.35 million active prepaid debit cards in consumer wallets, Henry noted.
Retail business expanded and will continue to grow with NetSpend’s MasterCard- or Visa-branded prepaid cards, which are available at more than 5,000 7-Eleven locations. In addition, NetSpend has partnered with Walgreens to provide card reload locations at up to 7,000 Walgreen locations nationwide, Henry said.
NetSpend continues to conduct pilots with first-quarter partnerships it arranged with entertainment conglomerate BET Network (see story) and PayPal Inc. (see story). Henry expects those agreements to further increase retail business.
“The PayPal prepaid cards that are available to consumers online will be in the physical retail locations by the second quarter,” Henry said. “We’re printing, shipping and racking those cards soon, so we expect to see the benefit from that in the second quarter.”
In addition, NetSpend continues to benefit from the tax-refund season, during which consumers can choose to receive their refunds in prepaid card accounts, he said.
NetSpend’s revenue rose 13.1% during the quarter, to $91.4 million from $80.8 million a year earlier. The company reported a net loss of $5.8 million, which includes the pre-tax litigation related losses of $25.3 million; the company reported net income of $7.8 million a year earlier.
The number of active cards with direct deposit rose 19.9%, to 1 million as of March 31 from 834,000 the previous year. The number of active prepaid cards totaled 2.35 million, up 4% from 2.25 million.
NetSpend could benefit as more companies push “green, paperless” approaches to pay employees’ salaries using direct deposit and consumers choose payroll debit cards for their deposits, Henry suggests.
In addition, the prepaid card business likely will expand when the federal government stops issuing paper checks in the coming years, thus moving many more potential customers into the prepaid card market, Gil Luria, analyst with Los Angeles-based Wedbush Securities, tells PaymentsSource.
“Even if those receiving government checks initially receive those payments on low-value prepaid cards, NetSpend and (competitors Green Dot) would be in a position to come in with their known brand names and offer an upgrade,” he contends.
NetSpend positions its high-value prepaid card as one that offers online billing and bill payment, payment alerts, funds transfers, and links to saving accounts, Luria says.
“NetSpend is in a really good place because reloadable prepaid cards are really in their initial steps,” Luria suggests. “But prepaid cards represent viable alternatives to checking accounts or [as a product] for those who are completely unbanked.”
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