Prospectus Summary
This summary highlights material information about our business and the offering of our Class A common stock. This is a summary of material information contained elsewhere in this prospectus and is not complete and does not contain all of the information that you should consider before deciding to invest in our Class A common stock. For a more complete understanding of our business and this offering, you should read this entire prospectus, including the section entitled “Risk Factors,” as well as the consolidated financial statements and the related notes thereto, before making an investment decision.
GreenSky, Inc.
Company Overview
We are a leading technology company that powers commerce at the point of sale. Our platform facilitates merchant sales, while reducing the friction, and improving the economics, associated with a consumer making a purchase and a bank extending financing for that purchase. We had approximately 11,000 active merchants on our platform as of December 31, 2017 and, from our inception through December 31, 2017, merchants used our platform to enable approximately 1.6 million consumers to finance over $11 billion of transactions with our Bank Partners.
Our market opportunity is significant. In 2017, there was approximately $315 billion of spending volume in the home improvement market, which historically has represented substantially all of our transaction volume, and substantial opportunities in the elective healthcare market, which we entered in 2016. In addition, at year-end 2017, according to the Federal Reserve System, there was approximately $3.8 trillion of U.S. consumer credit outstanding across a fragmented landscape of lenders, providing a significant opportunity for us to extend our platform to other markets where transactions are financed at the point of sale.
Over the past decade, we have developed and have been advancing and refining our proprietary, purpose-built platform to provide significant benefits to our growing ecosystem of merchants, consumers and banks:
Our platform is powered by a proprietary technology infrastructure that delivers stability, speed, scalability and security. It supports the full transaction lifecycle, including credit application, underwriting, real-time allocation to our Bank Partners, document distribution, funding, settlement,
and servicing, and it can be easily expanded to additional industry verticals as we scale our business. We have cultivated strong relationships with manufacturers and trade associations (which we refer to as Sponsors) to amplify the reach of our technology, enabling us to efficiently and cost-effectively onboard large numbers of potential merchants underlying each Sponsor. We offer potential merchants a platform that they can adopt without friction—including no upfront fees, capital expenditure, or onerous systems integration. When our merchants offer our solution at the point of sale, they provide our Bank Partners with cost-effective access to a vast number of consumers. This ecosystem of merchants, consumers and Bank Partners allows us to generate recurring revenues with minimal customer acquisition and marketing costs, resulting in attractive unit economics and strong margins.
As we scale, network effects reinforce and support the growth of our ecosystem. As our solution becomes integral to the manner by which our merchants regularly drive sales, these merchants and their sales associates become more deeply engaged and frequent users. As more sales associates, merchants and consumers benefit from our solution and develop affinity for our brand, we believe they promote GreenSky to other merchants and generate further organic interest. As more merchants and consumers become satisfied users of the GreenSky program, we are able to grow volume to support relationships with new Bank Partners and negotiate larger commitments from our existing Bank Partners. We believe these network effects reinforce an attractive virtuous cycle, whereby larger bank commitments allow us to facilitate more financing, which in turn enables us to serve more merchants and consumers.
We have a strong recurring revenue model built upon repeat and growing usage by merchants. We derive most of our revenue and profitability from upfront transaction fees that merchants pay us every time they facilitate a transaction using our platform. Thus, our profitability is strongly correlated with merchant transaction volume. The transaction fee rate depends on the terms of financing selected by a consumer. In addition, we collect servicing fees on the loan portfolios we service for our Bank Partners.
We have achieved significant growth in active merchants, transaction volume, revenue, net income and Adjusted EBITDA. Our low-cost go-to-market strategy, coupled with our recurring revenue model, has helped us generate strong margins. Transaction volume (which we define as the dollar value of loans facilitated on our platform during a given period) increased 31% from $2.9 billion in 2016 to $3.8 billion in 2017. Active merchants (which we define as home improvement merchants and healthcare providers that have submitted at least one consumer application during the 12 months ended at the date of measurement) increased 48% from 7,361 as of December 31, 2016 to 10,891 as of December 31, 2017. Over the same period, revenue grew 23% from $264 million to $326 million, net income grew 12% from $124 million to $139 million, and Adjusted EBITDA grew 21% from $131 million to $159 million. For information regarding our use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, see “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial Data.”
Our Market Opportunity
We believe technology is transforming and streamlining commerce, reducing the traditional transaction frictions that merchants and consumers face and opening new payments and financing channels for banks. Payments and consumer financing are vast markets in the United States with $13.4 trillion of personal consumption expenditure in 2017, according to the U.S. Bureau of Economic Analysis, and $3.8 trillion of consumer loans outstanding at the end of 2017, according to the Federal Reserve System. We believe the following trends define the U.S. consumer finance market, and other core markets, today.
Our Existing Markets—Home Improvement and Elective Healthcare—are Sizeable and Growing The home improvement market is large, fragmented and growing, representing approximately $315 billion in spending volume in 2017, according to the Joint Center for Housing Studies of Harvard University, although not all home improvement projects are of a size suitable for financing. Merchants in this market range from small, owner-operated contractors to large national brands and retailers. From our inception through December 31, 2017, our Bank Partners have used our program to extend over $11 billion of loans for home improvement sales and projects involving, among other things, windows, doors, roofing and siding; kitchen and bath remodeling; and heating, ventilation and air conditioning units. We believe that spending on home improvement goods and services will continue to increase as the national housing stock ages and existing home sales increase.
In 2016, we began expanding into elective healthcare, which, like the home imrovement market, is a large, fragmented market featuring creditworthy consumers who tend to make large-ticket purchases. We believe the elective healthcare market rivals in size the home improvement market in terms of annual spending volume, based on the number and cost of annual procedures performed. Elective healthcare providers include doctors, dentists, outpatient surgery centers and clinics providing orthodontics, cosmetic and aesthetic dentistry, vision correction, bariatric surgery, cosmetic surgery, hair replacement, reproductive medicine, veterinary medicine and hearing aid devices. We believe that because of population aging, innovations in medical technology and ongoing healthcare cost inflation, we are well-positioned to increase volume in the growing elective healthcare industry vertical.
We continually evaluate opportunities for expansion into new industry verticals. For example, we have identified significant opportunities within verticals such as online retail, power sports, auto repair and jewelry. These markets are also large and fragmented, and they similarly feature attractive consumers who make large ticket purchases.
Banks Seek Consumer Credit Exposure but are Not Well-Positioned to Lend at the Point of Sale We believe that banks seek attractive risk-adjusted yields and portfolio diversification through exposure to consumer credit. Banks’ traditional consumer lending advantages have included physical branch networks and trusted brands. However, our experience has demonstrated that consumers are increasingly comfortable using mobile devices to shop, make payments and manage finances. This has provided an opening at the point of sale for a new lending channel, but it is one that many banks to date have had a difficult time accessing.
Legacy Financing Solutions are Less Attractive to Consumers Providers of installment loan financing to consumers traditionally have required paper-based applications for which consumers are required to gather burdensome amounts of information. Accordingly, there often has been a substantial time lag between a consumer deciding to apply for a loan and receiving approval, and then from approval to funding. Meanwhile, revolving credit alternatives such as credit cards are faster and more convenient but are characterized by high rates and restrictive credit limits for large-ticket purchases. Consequently, prime consumers tend to use credit cards as payment, rather than financing, solutions. Absent a simple, fast and cost-effective alternative to finance large-ticket purchases, many consumers resort to paying with cash, debit card or check, or avoiding purchases altogether.
Our Ecosystem
We have built an entrenched ecosystem of merchants, consumers and Bank Partners. Our platform enables each of these constituents to benefit from enhanced access to each other and to our technology, resulting in a virtuous cycle of increasing engagement and value creation. We believe our ecosystem grows stronger with scale.
Value Proposition to Merchants
Value Proposition to Consumers
Value Proposition to Banks
Our Platform
Our Business Model
Efficient Go to Market Strategy
Visible and Recurring Revenue Streams Although we offer our technology at no upfront cost, we monetize through an upfront transaction fee every time a merchant receives a payment using our platform. This creates stable, recurring revenues, aligns our incentives with the interests of our merchants, and enables us to grow along with our ecosystem. In 2017, 93% of our transaction volume was generated from merchants that were enrolled on our technology platform as of December 31, 2016. In addition, our Bank Partners pay us a recurring servicing fee over the lives of their loans.
Attractive Unit Economics Our low-cost go to market strategy, combined with our visible and recurring revenue model, provides for a fast payback period and strong dollar-based retention:
We believe our fast payback period, combined with our strong dollar-based retention, indicates that our merchants will generate significant lifetime value for us relative to our cost of acquiring them.
Business Metrics
We review a number of operating and financial metrics, including the following, to evaluate our business, measure our performance, identify trends, formulate plans and make strategic decisions.
Active Merchants. Since our transaction volume is a function of the size, engagement and growth of our merchant network, active merchants (as defined above), in aggregate, are an indicator of future revenue and profitability, although they are not directly correlated. As of December 31, 2017, we had 10,891 active merchants on our platform, representing an increase of 48% over 7,361 as of December 31, 2016.
Transaction Volume. Transaction volume (as defined above) is an indicator of revenue and overall platform profitability and has grown substantially in the past several years. For the year ended December 31, 2017, transaction volume was $3.8 billion, which represented an increase of 31% over $2.9 billion for 2016.
Loan Servicing Portfolio. We define our loan servicing portfolio as the aggregate outstanding consumer loan balance (principal plus accrued interest and fees) facilitated and serviced by our
platform at the date of measurement. Our loan servicing portfolio is an indicator of our servicing activities. As of December 31, 2017, we had a loan servicing portfolio of $5.4 billion, representing an increase of 41% over $3.8 billion as of December 31, 2016. Our average loan servicing portfolio was $4.5 billion in 2017 and $3.2 billion in 2016.
Cumulative Consumer Accounts. We define cumulative consumer accounts as the aggregate number of consumer accounts approved on our platform since our inception, including both existing and prior accounts. Although not directly correlated to revenue, cumulative consumer accounts is a measure of our brand awareness among consumers, as well as the value of the data we have been collecting from those consumers since our inception. We may use this data to support future growth by cross-marketing products and delivering potential additional customers to merchants who may not have been able to source those customers themselves. As of December 31, 2017, we had 1.6 million cumulative consumer accounts, representing an increase of 45% over approximately 1.1 million as of December 31, 2016.
Our Strengths and Competitive Advantages
Differentiated Technology Platform and Customer Experience We believe that our proprietary, patent-pending technology is unique because it can deliver:
We believe these capabilities will help us deepen our existing relationships and provide a competitive advantage in winning new business.
Large, Entrenched Ecosystem As of December 31, 2017, we had 10,891 active merchants. From our inception through December 31, 2017, our Bank Partners have used our technology and network of merchants to provide over $11 billion of financing to approximately 1.6 million consumers. The powerful network effects of our platform strengthen this ecosystem, providing increasing value to GreenSky and each of our constituents as we scale.
Trusted Relationship with our Bank Partners We have continually refined and upgraded our compliance, control, servicing and collections functions to meet the regulatory requirements, documentation and operating standards applicable to our Bank Partners, which include several of the largest banks in the United States, and to us.
Asset-Light Model
Our Bank Partners originate and own the loans that they facilitate through our platform. We derive a substantial majority of our revenue and profitability from upfront transaction fees every time a merchant facilitates a transaction and receives a payment using our platform.
Attractive Consumer Profile Consumers using our platform live in all 50 states and typically are or have been homeowners with super-prime or prime credit scores. For all loans originated on our platform during the year ended December 31, 2017, the credit-line weighted average consumer credit score was 771.
Efficient Go To Market Strategy and Recurring Revenue Model Drive Strong Operating Leverage We leverage our proprietary technology and strong Sponsor relationships to efficiently access and onboard a large network of merchants. Our merchants, once acquired, allow us to reach an even larger universe of consumers and facilitate repeat transactions at very low cost relative to the transaction fee we receive. Coupled with the highly scalable technology anchoring our platform, we deliver strong operating margins.
Our Growth Opportunities
We have significant opportunities to expand our business. Our growth strategy focuses on the following efforts to continue to deliver value for our constituents and expand our ecosystem.
Grow Our Merchant Community We intend to continue building relationships with large Sponsors and independent, high-sales volume merchants in our existing core markets.
Expand into New Industry Verticals, Including Online Retail and Traditional Store-Based Merchants We recently expanded into the elective healthcare industry vertical and intend to explore other large, fragmented markets with creditworthy consumers who tend to make large-ticket purchases online and in-store. For example, online retail represents an attractive and low cost acquisition channel ripe for penetration that fits synergistically with our existing point-of-sale mobile platform. In 2017, domestic retail sales through the e-commerce platform exceeded $453 billion, growing by almost 16% over the prior year, according to the U.S. Census Bureau. We expect to seek out additional attractive industry verticals (whether online or in-store) based on our ability to efficiently go to market, grow market share, generate attractive risk-adjusted yields for our Bank Partners and continue to maximize value for our constituents.
Widen Our Spectrum of Consumers and Funding Partners We continue to evaluate opportunities to assist our merchants to drive more sales by extending financing to a wider range of consumer credit profiles. To facilitate this extension of our platform, we may work with our Bank Partners to offer near-prime and non-prime financing, leveraging our technology platform to offer merchants and consumers a “single application” user experience that is designed to be superior to the user experience offered by our competitors in traditional “second-look” programs. We may expand our universe of Bank Partners to undertake these opportunities.
Leverage Our Current Customer Base and Bank Partner Relationships to Deliver New Solutions We believe we have a substantial opportunity to cross-market value-enhancing solutions to consumers and to our merchants. We believe that, as the number of transactions we facilitate increases, the data we accumulate from our technology platform will enable us to broaden our monetization model and leverage this data to attract incremental customers whom merchants may not have been able to source otherwise. We also believe that we can leverage our platform to efficiently connect consumers, including existing retail customers of our Bank Partners, with merchant-driven promotions, expanding GreenSky’s brand and driving incremental revenue in each of our industry verticals.
Risk Factors Summary
An investment in our Class A common stock involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy and could materially adversely affect our business. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under
“Risk Factors” in deciding whether to invest in our Class A common stock. Some of these risks include that:
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as we remain an emerging growth company, we may take advantage of certain limited exemptions from various reporting requirements that are applicable to other public companies. These provisions include:
We have chosen to present three years of audited financial statements and related selected financial data and management’s discussion and analysis of financial condition and results of operations. Further, the JOBS Act permits emerging growth companies to take advantage of an
extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and to comply with new or revised accounting standards as required of publicly-traded companies generally. This decision to opt out of the extended transition period is irrevocable.
We have elected to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of our elections, which may result in a less active trading market for our common stock and more volatility in our stock price.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year following the fifth anniversary of the consummation of this offering, (ii) the first fiscal year after our annual gross revenues exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our Class A common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.
Organizational Structure
GS Holdings is a limited liability company that is taxed as a partnership. Because U.S. tax law generally makes it impractical for an entity taxed as a partnership to sell membership interests publicly, GSLLC has formed a holding company that will be taxed as a corporation, GreenSky, Inc., to sell Class A common stock publicly. However, for holders of Class A, B and C units of GS Holdings (which will be converted to Holdco Units in the Reorganization Transactions) that do not intend to sell their Holdco Units in connection with this offering, it is more tax efficient for them to retain their Holdco Units until they are ready to sell them and then, at that time, to exchange their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of Class A common stock (or cash, at our option, such determination to be made by the disinterested members of our board of directors) and then to sell those shares. This structure—the formation of a holding company taxed as a corporation above a limited liability company taxed as a partnership where some members of the limited liability company continue to own some or all of their membership interests—is often referred to as an “Up-C structure.”