Earnings Call Transcript - PRG Q1 2021

Operator, Operator

Good morning. My name is Kate, and I will be your conference coordinator. At this time, I would like to welcome everyone to the PROG Holdings, Inc. First Quarter 2021 Earnings Conference Call. This call is being recorded. I will now turn the call over to Mr. John Baugh, Vice President of Investor Relations for PROG Holdings. You may begin your conference.

John Baugh, Vice President of Investor Relations

Thank you, and good morning, everyone. Welcome to the PROG Holdings first quarter 2021 earnings call, our second as a stand-alone fintech business. Joining me this morning are Steve Michaels, PROG Holdings' President and Chief Executive Officer; and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website at investor.progleasing.com. During this call, certain statements we make will be forward-looking. I want to call your attention to our safe harbor provision for forward-looking statements that can be found at the end of our earnings release. The safe harbor provision identifies risks that may cause actual results to differ materially from the content of our forward-looking statements. There are additional risks that can be found in our latest 10-K filing. Listeners are cautioned not to place undue emphasis on forward-looking statements, and we undertake no obligation to update any such statements. On today's call, we will be referring to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, non-GAAP net earnings, and non-GAAP EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance.

Steve Michaels, CEO

Thanks, John, and good morning, everyone. We're excited to report our results for the first quarter of what we believe will be a pivotal year for our business, and the beginning of a return to our historical growth trajectory as the headwinds of the pandemic begin to subside. I want to start by thanking our employees for their tireless efforts to support our customers and point-of-sale retail partners as we continue to innovate and tailor our solutions to serve our customers however they choose to transact: mobile, online, or in-store. On our Q4 earnings call, we conveyed our excitement about the new opportunities that exist for us as a stand-alone company and our ability to drive incremental growth. We believe our first quarter results reflect the beginning of the return to GMV growth, positioning us to achieve strong 2021 results as we execute on our key initiatives. While the federal stimulus in March proved to be beneficial to the quarter's results, it is important to note that the company was on track to post results in excess of our first quarter outlook prior to the effects of the March stimulus. Revenues in the first quarter were $721 million compared to $668 million a year ago, a 7.9% increase, and were favorably impacted by elevated buyout activity and continued strong payment performance from our customers, by growth from certain large POS partners and by an increase in lease revenues generated from e-commerce platforms. Adjusted EBITDA was $118 million compared to $63 million in the year-ago period. This was primarily driven by a 580 basis point decrease in write-offs as our customers continue to demonstrate increased levels of liquidity, driving delinquencies to historic lows. On the decisioning front, we continue to optimize approval rates and amounts, which are in line or slightly higher than pre-pandemic levels, even considering the continued shift to digital application channels, which typically have lower approval rates. We closely monitor the performance of our leases, and we'll adjust accordingly should conditions change. Our GMV for the progressive leasing segment grew 10.4% in the quarter, marking a return to growth relative to the roughly flat performance of the prior three quarters. We should note that we achieved this double-digit growth despite facing headwinds in the quarter from the delayed tax refund season, smaller tax refunds on average, and continuing supply chain disruptions with some POS partners. While the March stimulus appears to have benefited results, we also saw a meaningful lift from the continued growth of our large national partners, decisioning optimization, product enhancements, and great progress in e-commerce penetration. We have been working aggressively with our partners on multiple fronts, including implementing enhanced technology solutions and strategic marketing and promotional campaigns. Also, expectations for improved store traffic in the back half of 2021 should provide a boost to our largest source of GMV. As a result, we believe we will deliver GMV growth in the mid- to high teens for the full year 2021. We continue to expand and improve our e-commerce capabilities, and we are increasing our traction on many fronts, particularly with larger POS partners. We are working to leverage our plug-in capabilities to attract new e-commerce partners while streamlining our process from application to lease signing. The company also recently announced several key additions to our technology, product, and sales leadership teams to support these efforts. We are on track to have e-commerce checkout capability with nearly all of our leading POS partners before the end of 2021, which we expect will further drive our GMV growth this year and into 2022. As we shared last quarter, we narrowly define e-commerce GMV as a completion of a lease in the retailer's cart checkout and that we expect to more than double our e-commerce business in 2021. We're pleased to report that in Q1, 14.3% of our GMV came from e-commerce compared to only 1.9% in the same period of 2020. As we have stated before, we believe our total addressable market remains multiples of the current market. I'd like to quickly revisit our key strategic objectives for expanding our leadership position. First, we aim to grow our business with existing and new POS partners. Second, we expect to continue to simplify and improve the customer experience through technology enhancements and investments that allow our customers to shop how, when, and where they want. Third, we plan to drive repeat business by leveraging our database of millions of customers. Fourth, we expect to expand our product and solutions ecosystem via further innovations and strategic acquisitions. Finally, we are increasing our direct-to-consumer marketing efforts to attract new customers and drive GMV to our POS partners. We communicated on our last call that we view 2021 as a very important year for our company. We recognize that the point-of-sale payment space is evolving rapidly, that competition is strong, and that the pandemic has changed our consumers' behavior. We are in the process of reinvigorating our growth, adding additional products and services to our ecosystem, converting pipeline opportunities, and improving our technology-based product capabilities to enhance our consumer and partner experience. Finally, shifting to capital and capital allocation, our balance sheet remains in great shape. We ended the quarter with a net cash position of $101 million even after the repurchase of $28 million of our stock in the quarter. Our capital priorities remain unchanged. First and foremost, we expect to invest in the business as we pursue multiple growth initiatives alongside our normal funding of GMV and our modest capital expenditure needs. Second, we will consider M&A opportunities that can broaden our product offerings or enhance our technical capabilities. And third, we expect to return excess cash to shareholders, which we commenced in Q1 with our buyback.

Brian Garner, CFO

Thanks, Steve. Turning to the financial results. The first quarter's financial results exceeded our outlook on both revenue and EBITDA due to the financial strength of our consumer and the accelerated growth of GMV. While quarter-to-date results were strong heading into the last two weeks of March, the latest stimulus further improved our financial metrics, driving delinquencies to near-historic lows. Throughout the quarter, we experienced elevated levels of 90-day buyouts, well above historical averages. This is a continuation of a trend that we have seen over the last 12 months, as prior stimulus packages and changes in consumer behavior have driven 90-day buyouts meaningfully higher. The latest stimulus further contributed to this dynamic as we closed out the period. While 90-day buyouts placed downward pressure on margins, the increased payment activity in the period drove revenue higher and write-offs lower, more than offsetting the dilutive impact of higher 90-day buyout levels. The net result was improved consolidated adjusted EBITDA margins year-over-year of 16.4% for the first quarter of 2021 compared to 9.4% for the same period last year. As we look ahead, we are encouraged by the trends we are seeing in our portfolio performance, supporting our 2021 financial outlook, which I will touch on in a moment. Turning to the results of our Progressive Leasing segment. Net revenues for the Progressive Leasing segment in the first quarter reached a record of $708 million, an increase of $49.4 million or 7.5% compared to the first quarter of 2020. While the increased buyout and payment activity helped drive revenue higher in the period, Progressive's GMV increase of 10.4% benefited from the continued scaling of large national retail partners and increases to our e-commerce penetration. With respect to revenue headwinds in the period, as noted on our Q4 earnings call, we entered Q1 with gross leased assets, a reflection of overall portfolio size, at $1 billion, down 5.6% year-over-year and finished the quarter at $951 million, down 6.7%. In short, our customers in the period paid down their lease balances at a faster rate than GMV grew, resulting in a lower portfolio balance for the quarter. Because gross leased assets drive future period revenue, the smaller portfolio will serve as a headwind to revenue in the short term. As Steve stated, we expect our 2021 GMV growth to be in the mid- to high teens, contributing to portfolio growth over the course of the year. The Progressive Leasing segment's gross margin was 28.7% for the first quarter versus 29.6% for the same period last year, a 90-basis point decline year-over-year as the impact of 90-day buyouts drove the gross margin lower and were offset by strong payment performance in the period. SG&A expenses, excluding write-offs for the Progressive Leasing segment, were $72 million, 10.2% of revenues in the quarter compared to 10.4% in the prior year period. While investment in technology and product enhancements continue to ramp, we reduced levels of discretionary spend in the period, consistent with prior periods impacted by COVID. Progressive Leasing's write-offs, which have historically ranged from 6% to 8% on an annual basis or 2.6% in Q1 of 2021 compared to 8.5% in the year-ago period. This quarter's results benefited from near-historic low delinquencies at the end of the period and strong portfolio performance previously mentioned. Of note, in the first quarter of 2020, we recorded $16.1 million in incremental reserves relating to the COVID pandemic. We continue to evaluate the appropriate levels of our reserves based upon relevant historical and anticipated payment performance. In the period, we released the COVID reserves by $2.5 million as we are encouraged by the low delinquency levels we are seeing. While we expect near-term write-offs to be below our targeted annualized range, we anticipate a return to historical levels as macroeconomic contingencies normalize over time. Adjusted EBITDA for the Progressive Leasing segment was a first-quarter record of $116.3 million, a 59.4% increase year-over-year and a 16.4% margin. The margin performance was primarily driven by improved portfolio performance and associated lower write-offs. Pivoting to consolidated results. Consolidated adjusted EBITDA, including our Vive segment, was $118.1 million for the first quarter of 2021 compared to $62.6 million for the same period last year, an increase of $55.5 million or 88.7%. Adjusted EBITDA was 16.4% of revenue in the first quarter of 2021, up 700 basis points from the 9.4 in the first quarter of the prior year. GAAP EPS was $1.16 compared to $0.85 in the year-ago period. Non-GAAP EPS was $1.22 compared to $0.41 for the same period in 2020. Now turning to our balance sheet and liquidity profile. We generated $167.1 million in cash from operations in Q1. We ended the quarter with a cash position of $151.2 million and debt of $50 million. We have $300 million available under our revolving credit facility, and we purchased $28.1 million of shares in the quarter, and our remaining share repurchase authorization is $271.9 million. Finally, as you have seen in the earnings release, we provide the outlook for the full year of 2021. We expect consolidated revenues between $2.7 billion and $2.775 billion, adjusted EBITDA between $380 million and $400 million, and non-GAAP EPS of $3.80 to $4.05. This outlook assumes strong customer payment activity, no additional stimulus, and no significant deterioration in the current retail environment throughout the remainder of the year. It also assumes a 25% tax rate and no additional share repurchases.

Kyle Joseph, Analyst

Congratulations on a strong recovery in the quarter. So I wanted to first touch base on GMV and just kind of get a sense for the cadences throughout the quarter. I know you guys mentioned last quarter that January and February were positive, and there were some incremental impacts from the stimulus, but just give us a sense for how that looks in March and maybe into April?

Steven Michaels, CEO

Thank you, Kyle. In our previous call when we reported Q4 at the end of February, we indicated a mid-single-digit increase, which was influenced by a small but noticeable effect from the January stimulus. Additionally, during the earnings period for Q4, we were experiencing a severe weather event in Texas along with an unusually delayed tax season. These factors typically evolve as time goes on. We were on track for mid- to high-single-digit GMV growth for the quarter. However, once the March stimulus was introduced, we observed a typical short-term spike in applications due to the liquidity in consumers' accounts. It seems that with each occurrence, this spike is somewhat less enduring. While it did provide a slight boost into April, our focus is primarily on the initiatives we have implemented to enhance GMV through decision-making, product innovation, and our promotional and marketing efforts. We are pleased with our Q1 results and are optimistic about the upcoming year.

Kyle Joseph, Analyst

Got it. In the fourth quarter, we faced several challenges, especially with our brick-and-mortar exposure and some difficulties in underwriting. Additionally, there were issues related to the resolution of the supply chain. In the first quarter, it appears that we experienced positive growth in e-commerce and from our retail partners. However, it seems that we didn't fully benefit from the retail side reopening, if I'm interpreting your comments correctly.

Steven Michaels, CEO

Yes. I believe you accurately identified the challenges we faced in 2020. We dealt with store closures, limited in-store traffic, and supply chain disruptions, along with certain decisions we made. We anticipate a shift from challenges to positive trends, although we haven't fully realized that yet. We expect that as we move into the latter half of the year, with more reopenings and the continued growth of our e-commerce capabilities, people will be shopping in stores more often. We believe these positive trends will become more apparent in the second half of the year compared to the first quarter. Overall, we feel well-prepared.

Kyle Joseph, Analyst

Got it. One last question for me, and I'll hop back in the queue. Obviously, elevated buyout activity from stimulus, that's not surprising. But can you walk us through your experience in 2020 when you saw stimulus kind of expire at the back half of July, like how long it took for buyout activity to start to normalize in 2020 and your expectations for that kind of better factored into your '21 guide this year?

Brian Garner, CFO

Yes, Kyle, this is Brian. I can take that. The dynamics throughout 2020, I think throughout stimulus and even well after stimulus, we saw elevated 90-day buyout activity. And I think that speaks not only to stimulus, but some changes in consumer spending patterns that allowed them additional liquidity to exercise those buyouts. So really for the better part of the last 12 months, 90-day buyouts have been elevated. And I think going forward, our expectation is that they should remain elevated, certainly not at the rate that we saw here in Q1. I think it was abnormally high, particularly with the size of the stimulus and the magnitude of the checks that got cut to these households. So it was elevated in Q1. I expect it to continue to be elevated and tapering off throughout the year. But your question about 2020 is, we saw it really since March on elevated 90-day buyouts.

Jason Haas, Analyst

Congrats on the great quarter. So I wanted to dig into write-offs a little bit. I'm curious just what's implied in your guidance, and just how you're thinking about that as we move through the year?

Brian Garner, CFO

Yes. I'm happy to take that. Certainly, the rates that we're seeing here in Q1 and what we've seen over the last couple of quarters are well below the 6 to 8% that we were accustomed to seeing. I think, obviously, it's anybody's guess on when we return to normal and when the economy kind of gets back to what we saw in 2019. But the 2.6% that we posted here in Q1, my expectations for the year—that's our low point. And we'll see somewhat of an increase as we move throughout the year. But I think when it's all said and done for the year, we'll still post below that 6% to 8%, just given the dynamics that are at play, the consumer health that we are seeing and the liquidity that seems to be in the market right now. So that would be my expectation is somewhere below the 6% to 8%, but not hovering at these 2.5% levels.

Jason Haas, Analyst

Got it. And then as a follow-up, changing topics a bit. I'm curious if you could speak to the growth that you're seeing in e-commerce. You've made really fantastic progress there. So I'm just curious, since you laid out a target for the low- to mid-teens penetration for the year. I mean, if that's still the right framework? Or if there's potentially upside to that now?

Steven Michaels, CEO

We're very pleased with our e-commerce business. It stands as a significant operation on its own, and we have excellent partners involved, along with exciting new opportunities in the pipeline. We are not adjusting our guidance, which indicates more than a doubling from last year. While we don't anticipate the extreme year-over-year increases seen previously, we do expect substantial growth in e-commerce this year. There's definitely potential for more growth, and we aim to expand the overall market size while increasing the gross merchandise volume across all channels. We believe e-commerce GMV will outpace overall growth for a while, but we're not focused on achieving a specific sales balance from any one channel. We want to let customers decide how they wish to interact with us. We think that in almost every shopping journey, digital channels will play a role, but it doesn't mean customers will always check out online or via the app, and that's perfectly fine. We're excited about the potential in e-commerce and look forward to sharing our ongoing successes.

Alexander Maroccia, Analyst

First one is on improved customer payments. As we get to the back half of the year, have you thought about a scenario where 90-day buyouts return to normal while monthly payment activity remains high? And how beneficial would that be for margins?

Brian Garner, CFO

Yes. So with respect to 90 days, 90 days actually put downward pressure on margins overall. And the reason why, as I said in my prepared remarks, the reason why we're seeing 16-plus percent overall EBITDA margins, is that dilutive impact of those elevated 90 days are effectively being offset by near-record low write-offs and just overall health of the consumer. So there's really that kind of give and take going on in the P&L right now within our dispositions. In isolation, 90 days are dilutive, but the net result has been strong portfolio health and higher cash-on-cash returns. So in the event that 90 days continue to be elevated, which within our guidance, we anticipate an element of that, we also anticipate that the write-offs will be below our historical ranges, like we talked about. And I think the net result is, for the year, as really implied in the guidance that we gave, is pretty strong EBITDA margins overall, a little uptick from what we've seen historically. So that's kind of what's baked into the guidance and how we're thinking about the 90-day dynamic in conjunction with overall portfolio performance of write-offs.

Alexander Maroccia, Analyst

And the 90-day buyouts basically go back to normal, but we still see better-than-average payment activity. Would that be a material margin benefit in the back half?

Brian Garner, CFO

Yes. That would be a benefit. If they went back to normal and the payment activity was to a magnitude higher, that would be a scenario that would work out well for us.

Alexander Maroccia, Analyst

Okay. Got it. And secondly, can you just give us a sense of strength in various categories? And if any products might have been abnormally weak that could reverse in the coming quarters?

Brian Garner, CFO

Yes. I mean, we saw strength in mobile. We saw strength in jewelry. We saw strength across most of the categories. We had various or sporadic, I would call it, supply chain issues continuing in some of the furniture categories. That was not widespread across the entire category, but in some of the retail partners, we still saw that. And so we look forward to that easing as well in the rest of the year. But just pretty good strength across the categories.

Bradley Thomas, Analyst

Nice quarter. I got on a few minutes late getting off of another earnings call. I apologize if you addressed this. But when we think about the GMV growth of 10.4%, I know you can't know this for sure, but do you have any estimate of perhaps how much of a benefit or lift you got because of all the stimulus that was occurring in and around the quarter?

Steven Michaels, CEO

Yes, Brad, this is Steve. We discussed this briefly. As we mentioned during the February call, we were seeing mid-single digits growth up to that point. We believe our growth would have been in the mid- to high-single digits without the March stimulus. However, with the stimulus, we achieved a growth rate of 10.4%. Some factors were slightly favorable, but they do not explain the entire situation.

Bradley Thomas, Analyst

That's helpful. And you've obviously given clear revenue guidance for the year, but how are you thinking about GMV trends trending in the quarters ahead here?

Steven Michaels, CEO

Yes. Not in the earnings release, but in the prepared remarks, we did say that we believed GMV would come in, in the mid- to high teens for the year, and that would imply that we've printed the lowest quarter of growth already. It's actually a very exciting front for us because we've seen that already. We've seen that in Q1, and we have good plans, partnering with the partners and their marketing teams. We've seen – to your question, we've seen partners that have not historically reached for some of our tools in our toolkit, actually doing that, and that's encouraging. We've seen some co-branded marketing campaigns that the retailers haven't been interested in doing in the past, which is great, drives GMV for them and for us. We've seen some cooperative reduced IP type promotions. And so we've got – as you know, we have a stable or a suite of solutions that they can reach for. And we're talking to them all the time about that, and we're having a lot of luck. And we've seen that already, and we've got good plans on the calendar for the rest of the year that we're excited about.

Robert Griffin, Analyst

Congrats on the quarter. So I wanted to circle back up on GMV growth, targeting mid teens. The 2-year stack, though, does step down if you do mid teens versus kind of what you just printed in 1Q. Is that just a function of some uncertainty, and stimulus wearing off and kind of not having a crystal ball into the environment? Or are you seeing something different inside the customers that we should think about as well?

Steven Michaels, CEO

Well, yes, Bobby, I mean mid- to high teens is, we think, is pretty strong, and we certainly aren't going to be satisfied with that. We're going to work to make it more than that. From a 2-year stack standpoint, you've got to remember what happened in the back half of '19. We had really accelerating GMV growth in the back half of '19, culminating with a 35.8% GMV growth in Q4. So the quantum and the numbers in dollars really get large when you start doing that 2-year stack. And so that has certainly an influence on the growth rates this year. From a dollar standpoint, the GMV troughed in dollar terms in Q2 of 2020. And so we'll expect that Q2 will be our fastest growth rate in percentage terms, but we're looking for a really strong growth in the back half as well. And I think it has more of a function to do with what the base number is, going all the way back to '18 on a 2-year stack, than it does on what our excitement is and our expectations are for the back half of '21.

Robert Griffin, Analyst

All right, that makes sense. That's very helpful. And very fair points with that 34% there in 4Q of '19. And building out that kind of GMV expectation, can you talk a little bit – I mean, we've talked a lot about building up the e-commerce platforms for some of your big partners as well as maybe getting some of the technology where you could be the plug-and-play type things on some other platforms. Any updates on how those initiatives are going and what's assumed on timing of those to hit that mid-teens numbers?

Steven Michaels, CEO

Yes. So from a development standpoint, we've already got some of the plug-ins in the wild, and I think we put a release out on that in March. We're still on track to have basically the suite of platform plug-ins by the end of Q2. And we think that will be – that we know that will be helpful. I'm not sure exactly how much GMV that will drive actually in '21, but it's certainly foundational efforts that we are working hard on to keep the GMV machine growing into '22. As it relates to our larger POS partners, we're working with them diligently. The tech teams are in constant contact. We don't control the timing of that completely because, obviously, when it comes to a custom integration, it's not just us throwing an API over the fence. It's a little more complicated than that. And so we're working with them, and we expect – we still have a strong belief that we're going to be live in the checkout card with most of our retail partners in '21. But as the year gets deeper, it is probably less impactful to the '21 GMV and more of a '22 story. So we think that there's big upside there. But the numbers that we're looking for in '21 are not reliant on really large deliverables from those projects because they're probably more '22 projects. I mean, there are '21 projects, but they'll deliver the GMV in '22.

Robert Griffin, Analyst

All right. That's very helpful. And I guess lastly for me is just a high-level industry type question. Clearly, a lot of activity, new companies in the industry, capital getting thrown at the space. I mean, what do you – what is that driving in terms of what you're seeing for competing for customers, holding on to your current customers? I mean, have you seen the competitive environment drastically increase? Or has this kind of always been the case in the virtual rent-to-own space? We just didn't see it as well because most of these small players were private before and doing kind of more quiet fundraisings and different things like that.

Steven Michaels, CEO

Maybe a little bit of both. I mean, it's always been a competitive space, and we've talked extensively about how it's competitive in the SMB space in the regions, and that hasn't changed, and we expect that won't change in the future. On the enterprise side, on the larger accounts, it's been a different story. And – but we expect we'll see some of these competitors that you're referring to more in the future than we saw in the past. There has been some excitement around the space, but in the grand scheme of things, it's been a fairly short period of time. So I can't say that we've seen material changes yet, but we're not resting because we're expecting that to happen, and we're prepared to show well.

Michael Young, Analyst

Actually wanted to start with the first one to follow up to Bobby's question. Just as you see kind of the increased adaptation of BNPL, et cetera, across the industry. Are you seeing increased awareness of the product or maybe an increased desire for new partners to find a partner? And is that helping at all on the sales front?

Steven Michaels, CEO

Yes. I would so – that's a great observation. I mean, I think generally, COVID was an interesting year because of BNPL and the – basically it blew up. And whenever we have an educated retailer that understands the power of a fully developed finance stack, that's a good thing for us, especially if they don't have a lease-to-own solution. So it certainly shortens the sales cycle when you're – there's always an education process, and we're happy to do that, and we're happy to talk about the voice of the customer work, and how the customer feels about lease-to-own, and how they feel about the retailer's brand for offering lease-to-own. But to your point, if they've looked at a BNPL product or actually installed 1 or have one, that means that they're very educated on the full – on the power of the stack. Now on the flip side, it can actually take some mind share and some debt resources. And that can be a competing priority. And it's our job to say, well, listen, that product is a good product, and we think you should have it. But listen, the size of the prize for LTO is larger. So we think you should prioritize this ahead of that. And that's always a dance within any organization, is the prioritization stack, especially when it comes to sprints in development cycles. But on the whole, I would say it's been positive for us and for the sales cycle, just having a more knowledgeable potential retailer prospect. Thank you, everyone, for joining us today. We certainly appreciate your interest in PROG Holdings. Our team is super excited about our momentum and our opportunity to continue Progressive's impressive history of growth and innovation. I want to thank all of PROG Nation for their tireless efforts to innovate and simplify, which is one of our core values on behalf of our customers and retail partners, and we look forward to updating you next quarter.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.