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Green Dot (NYSE:GDOT) is the US's leading provider of general purpose reloadable prepaid debit cards, which seek to address the 60+ million Americans that lack full access to traditional checking and savings accounts. The company's 3.4 million customer base is mainly younger, low/middle income Americans who are attracted to the card's convenience, lack of overdraft fees and minimum balances, and its usefulness for personal budgeting. With nearly $6 billion loaded onto its cards in calendar year 2009, representing a market share of over 40%, Green Dot believes its leading position gives it a strong platform for continued high growth and margin expansion. The IPO will consist of 3.9 million shares sold by existing shareholders; JPMorgan and Morgan Stanley are the bookrunners on the deal.

The cards

With many Americans frustrated by overdraft fees on checking accounts or lacking sufficient cash to open bank accounts, a Green Dot card offers an alternative that still allows customers to avoid using cash for day-to-day purchases, shop online, reserve hotel rooms, and control budgets. Customers can purchase and load Green Dot's prepaid cards at 50,000 retail outlets such as Walmart and Walgreens, use them anywhere major credit cards are accepted, reload them with cash at a retail location or via direct deposit and withdraw cash at ATMs. The cards generally cost $4.95 to purchase or reload and users pay $5.95 per month to maintain the card.

The model

Most of Green Dot's revenue, which totaled $291 million in the last twelve months, consists of fees for new cards and reloads as well as monthly maintenance fees. It also earns interchange fees when customers make purchases. The company pays its retail partners incentives based on the volume of cards they sell, but earns a wide enough spread to earn EBITDA margins near 30%. Because the company does not need to maintain its own store infrastructure, it has low capital expenditure requirements, which keeps its free cash flow strong ($31 million in the most recent quarter). Additionally, the model is scalable, which should allow margins to increase over the long term.

The risks

While Green Dot has a leading market position and strong financials, the story is not without significant risks. Cards issued through its exclusive agreement with Walmart account for 63% of revenue, and the company recently renegotiated this contract on less favorable terms. This comes a year after Green Dot halved its new card fees, and it is clear that the company will continually have to balance the fees it charges its customers and the payments it makes to retailers. Competition in the space is increasing (another prepaid provider, Netspend, which had $240 million in revenue in the last twelve months, just filed for an IPO), and with other technologies such as mobile commerce and contactless cards being developed, it is unclear how the payments market will evolve in the future. Lastly, the industry is highly regulated; although prepaid cards avoided the limits placed on interchange fees by recent regulation, they could eventually come under the same scrutiny as traditional debit and credit cards.

The IPO

Green Dot's leading position in a fast-growing market (cash loaded onto prepaid cards is expected to grow 92% annually over the next four years) should generate interest in this IPO. While insider selling on the deal is a negative and a valuation that puts it at 38x trailing earnings does not make it cheap, investors are likely to be attracted to the company?s solid financials and strong growth potential. Additionally, the successful debuts of unique high-growth IPOs RealD (NYSE:RLD) and Qlik Technologies (NASDAQ:QLIK), which both gained over 20% after pricing last week, could add a tailwind to the Green Dot IPO.

Source: Green Dot IPO: Connecting the Dots