Earnings Call Transcript - PRG Q2 2021

Operator, Operator

Good morning and thank you for joining the PROG Holdings, Inc. Q2 2021 Conference Call. I will now hand it over to John Baugh, VP of Investor Relations. Please continue.

John Baugh, VP of Investor Relations

Thank you, and good morning, everyone. Welcome to the PROG Holdings second quarter 2021 earnings call. 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 investors.progholdings.com. During this call, certain statements we make will be forward-looking, including the updated outlook for our full year 2021 adjusted EBITDA, non-GAAP earnings per share, and GAAP earnings per share performance. 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. With that, I will now turn the call over to Steve Michaels. Steve?

Steve Michaels, CEO

Thanks, John, and good morning, everyone. We're excited to report our Q2 financial results, which reflect an acceleration of growth, as we continue to navigate the landscape of the pandemic. GMV for our Progressive Leasing segment grew 25.2% over the prior year period, an increase from the 10.4% GMV growth in Q1. While this comparison is against retail shutdowns occurring during the depths of the pandemic, GMV growth in the second quarter of 2021 was largely driven by the continued scaling of large national accounts and increased penetration in e-commerce. E-commerce GMV grew 274% in the quarter and represented 13% of Progressive Leasing's GMV. We continue to expect e-commerce to be a meaningful driver of growth in the future. As we recently announced, we've enhanced our plug-and-play capabilities with the deployment of our updated Magento 2 and WooCommerce plug-ins. The enhancements allow one-click integration by retailers and reduce the time from application to checkout for consumers. We've already seen positive momentum from these updates with some of our existing POS partners, and we're engaged in discussions with potential new retailers that utilize these e-commerce platforms. We believe that increasingly, the consumer's purchase journey will be a multi-channel experience, and we offer solutions that allow them to transact when and where they choose. As I mentioned, Progressive Leasing delivered a strong 25.2% GMV growth rate in the quarter compared to the prior year period. We expect Q2 will be the peak of our year-over-year GMV growth rate in 2021, with the back half of the year weighted more heavily towards Q4 growth. We continue to believe we will deliver mid-to-high teens GMV growth for the full year 2021. We should note that there remain a number of uncertainties, including the impact of monthly child tax credit payments, which we will see through the rest of 2021 and potentially beyond. While data is very limited, our expectation is that we will not see a spike in early purchase options similar to the spike we saw following the large single payment stimulus checks that benefited portfolio performance but served as a headwind to GMV growth. We continue to hear from our POS partners that the use of POS financing across the credit spectrum remains below pre-pandemic levels. Our revenues in the second quarter were $660 million compared to $599 million last year, an increase of 10.1%. Our growth in revenue was driven by continued improvement in our portfolio size, as strong GMV performance added to our leased asset balance in the period. 90-day buyouts declined from the peak of late Q1 2021, although they are still higher than pre-pandemic levels. Gross margins benefited from strong portfolio performance. During the quarter, we continued to experience delinquencies and write-offs near historic lows, driving our EBITDA above our more typical annual range of 11% to 13%. Our adjusted EBITDA was $104.9 million versus $73.5 million last year, an increase of 42.7% for a margin of 15.9% of revenues. Recently, we completed the acquisition of Four Technologies, a Miami-based BNPL company that allows consumers to pay for merchandise through four interest-free installments. We are excited about how combining Four with Progressive Leasing and Vive builds upon our direct-to-consumer growth strategy and delivers an exceptional value proposition to retailers looking to offer their customers additional payment options. We're pleased that the Four team is excited about the opportunity for value creation and has agreed to continue leading Four Technologies as a separate business and subsidiary of PROG Holdings Inc. As disclosed in our second quarter 10-Q, we paid $23 million in cash for the business. There are also several multiyear performance-based metrics that could result in additional equity-based payments for the Four team. Most importantly, we believe the addition of Four to our digital platform will allow us to grow and leverage our large database of loyal customers, as well as increase the value of our offerings to current and potential new retail partners. We do not expect the transaction to be material to our consolidated financial results in the near term, but strategically we think owning Four will drive incremental growth in our core LTO business. The company also repurchased approximately $50 million of stock during the quarter. Even with the growth in GMV and the cash used in the acquisition and buybacks, we ended the quarter with a net cash position of $88 million. Our capital priorities remain unchanged. First, we will fund organic growth. Next, we will look for strategic M&A opportunities that are largely focused on new products or technical capabilities. And lastly, we will return excess cash to shareholders. In Q2, we delivered across all three of these capital allocation priorities. Finally, I want to thank our employees for their commitment to our customers and partners as we strive to innovate and tailor solutions that will enable consumers to shop however, wherever, and whenever they want. I'll turn the call over to our CFO, Brian Garner, who will discuss our financial results in more detail. Brian?

Brian Garner, CFO

Thanks, Steve. The second quarter's consolidated financial results reflect strong GMV growth in the period and a continuation of elevated customer payment performance as delinquencies remain at near historic lows, driving higher portfolio yield and expanded margins. I'll begin with comments on our Progressive Leasing segment. As a result of GMV growth and moderating 90-day buyout activity, the lease portfolio size, measured as gross leased assets on our balance sheet, grew in the second quarter, reversing from the declining trend we observed throughout the prior periods of the pandemic. 90-day buyouts for the quarter dropped from the stimulus-related Q1 levels while remaining consistent year-over-year. However, 90-day buyouts are still elevated compared to pre-pandemic levels. We are encouraged by the quarter's 25% GMV growth and the positive trends we are seeing in portfolio size and performance, although higher levels of liquidity within our customer base may continue to act as a headwind for GMV. With respect to portfolio size, which is a key driver of future revenues, we entered Q2 with gross leased assets at $951 million, down 6.7% year-on-year, and finished the quarter at $1 billion, up 7.9%. In short, our GMV growth in the second quarter more than offset buyout levels, resulting in a higher portfolio balance for the quarter. We expect this trend to continue throughout the remainder of the year. Revenues for the Progressive Leasing segment were $646 million, an increase of $56 million or 9.5% compared to the second quarter of 2020. Revenue benefited from an increased portfolio size and strong payment performance. Progressive Leasing's gross margin was 31.9% for the second quarter versus 28.7% for the same period last year, a 320 basis point increase year-over-year as the impact of strong customer payment performance drove higher gross margins. SG&A, defined as operating expenses excluding write-offs and amortization for Progressive Leasing, was $79 million or 12.3% of revenues in the quarter compared to 10.5% in the prior year period. This reflects a return to pre-pandemic levels as we expect SG&A to increase for the remainder of the year as we invest in technology and product enhancements and also incur additional public company costs not present in the prior year period. Progressive Leasing's write-offs, which historically ranged between 6% and 8% annually as a percentage of revenues, were 4.8% in Q2 of 2021 compared to 6.1% in the year-ago period. This quarter's results benefited from low delinquencies in the period and the strong portfolio performance previously mentioned. While we expect 2021 write-offs to be below our historical annualized range, we anticipate an increase in the back half of this year and into 2022. Of note, in the first quarter of 2020, we recorded $16.1 million in incremental reserves due to the economic challenges and uncertainties arising from the COVID pandemic. We continue to evaluate the appropriate levels of our reserves based upon recent results and anticipated payment performance. In the second quarter, we released $5.3 million of COVID-related reserves, and we are encouraged by the low delinquency levels we are seeing. Adjusted EBITDA for Progressive Leasing in the second quarter was $100 million, a 35.4% increase year-over-year and a 15.5% 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 financial segment, was $104.9 million for the second quarter of 2021 compared to $73.5 million for the same period last year, an increase of $31.4 million or 42.7%. Adjusted EBITDA was 15.9% of revenue in the second quarter, up 360 basis points from the 12.3% in the second quarter of the prior year, driven by the portfolio performance I previously mentioned. We expect that as macroeconomic conditions normalize over time, EBITDA margins will return to our more typical historic annual range of 11% to 13%. GAAP diluted EPS was $1.02 compared to $0.87 in the year-ago period, and non-GAAP EPS was $1.09 compared to $0.92 for the same period in 2020. Now turning to our balance sheet and liquidity profile. We generated $71.2 million in cash from operations in Q2, ending the quarter with a cash position of $137 million and debt of $50 million. We have $300 million available under our revolving credit facility. During the quarter, we purchased $49 million of shares with $223 million remaining of our $300 million share repurchase authorization. Finally, as noted in this morning's press release, we are increasing our full year 2021 consolidated outlook for adjusted EBITDA to a range of $390 million to $405 million, up from the previous range of $380 million to $400 million due to better-than-expected portfolio performance. This outlook assumes a slight deterioration in customer payment activity, a 25% tax rate, and no additional share repurchases. It also assumes no negative impacts to our financial performance relating to the child tax credit payments, dislocations of the global supply chain, or the emergence of additional COVID variants, including potential subsequent governmental responses to those variants. With that, I'll turn the call over to the operator for the question-and-answer portion of the call.

Operator, Operator

Our first question comes from Jason Haas with Bank of America.

Jason Haas, Analyst

So to start, Steve, I think you said in your prepared remarks that you're expecting fourth quarter GMV growth to be stronger than Q3, if I heard that correctly. And I thought on the last call, we talked about the compares on a 3-year stack basis being tougher in the fourth quarter. So I'm just curious if you could provide some more color on what's driving that outlook.

Steve Michaels, CEO

Sure, Jason. I think we said last time that on a 3-year stack, the back half was tougher than the front half just because of some of the launches we had in early 2019, and that still does remain the case. I just think that the reason that we waited and said that GMV growth in the back half will be more weighted to the fourth quarter is because of the all-important holiday season and how last year, we were certainly impacted by the lack of in-store traffic during the Black Friday period and just generally holiday, along with some of the e-commerce initiatives that we'll have for this year, counteracting that. So we still think we're on track for that overall GMV guide for 2021, but the back half, from a percentage growth rate, will be a little bit more weighted to Q4.

Jason Haas, Analyst

So just to clarify that, it sounds like you were referring to a GMV on a dollar basis, not comparing the year-over-year percentage growth between Q3 and Q4. Is that right?

Steve Michaels, CEO

Well, no, really both. The dollars will certainly be higher in Q4, but percentage growth rates will also be higher in Q4 than Q3.

Jason Haas, Analyst

As a follow-up question, it seems you exceeded consensus EBITDA by about $20 million, yet you only adjusted your guidance upwards by approximately $5 million to $10 million. I'm interested to know if there have been any changes in your outlook for the second half of the year. It appears there might be some additional cost pressures or investments, and you mentioned new public company costs. Could you clarify what has really changed regarding your outlook for the second half?

Brian Garner, CFO

Sure, I can address that. It's Brian. To compare the first half to the second half, it’s important to understand the evolving dynamics. In the first half, we benefited from unusually high buyout rates, which boosted our revenue. We do not anticipate that level of momentum continuing in the second half. However, this decrease will largely be offset by the growth of our portfolio, which increased by 8%. These two factors are expected to balance out revenue between the first and second halves, give or take. Looking at SG&A expenses, the first half showed a significant reduction, particularly in Q1, as we limited spending due to the remnants of COVID-19 impacts from 2020. I expect that in the second half, we will increase our investments. Historically, in 2019, our SG&A was just over 12% of revenue for the Progressive Leasing segment, which fell to 11% in 2020 because of COVID. We are now shifting back to pre-COVID spending levels as we find growth opportunities that yield positive returns. Thus, we anticipate increased spending in the second half. Additionally, we foresee a decline in portfolio performance in the second half compared to the first. We previously mentioned expected write-offs of 6% to 8%, but a more realistic expectation for the year and particularly for the second half is something below that range, although we do expect an uptick from the first half. During the past quarter, we started with very low delinquency rates, which we noted in our Q1 call. However, as the months progressed, we saw a slight increase in delinquencies as the effects of stimulus faded. While the data is still early and liquidity remains substantial, we anticipate some level of increase in delinquencies. All of these factors contribute to a lower margin expectation for the second half compared to the first half, and that's the context for our guidance.

Jason Haas, Analyst

If I could ask another question, I noticed that you highlighted the strong performance of your large national partners in both the press release and during the call, which is very promising. I recall that in the previous call, you mentioned plans to enhance marketing with those partners. I'm curious if that had an impact, or if you could share any additional insights on how those partnerships are developing. Also, can you provide any information on the potential to bring in more large partners?

Steve Michaels, CEO

Yes, Jason. The marketing is definitely an area of opportunity for us, but also a bright spot. I think we said on the last call that we've seen more of our partners reaching into that toolkit that we have and partnering well with our marketing teams, and that certainly continued in Q2. And we have a nice calendar for the back half of the year to continue partnering with our marketing teams to hopefully drive more GMV for us and for our partners. So that is certainly a driver. But generally, it's just the normal productivity gains that we see as our relationship matures, and we're still in the very early innings of a few of these relationships, but we continue to be pleased with what we're seeing from the gains there.

Jason Haas, Analyst

That's great. And on the pipeline, how does that look?

Steve Michaels, CEO

Yes, pipeline is good. I mean, I know frustratingly, we don't call out names for you guys. But we're really pleased with our conversations and some of the advancements that we've made through the sales cycle and are encouraged by what that could mean for future periods in terms of our conversion and ultimate growth rates.

Operator, Operator

Our next question comes from Kyle Joseph with Jefferies.

Kyle Joseph, Analyst

You guys touched on credit normalization and the outlook for that. Can you just give us a sense for how you see the changes in child tax credit impacting the business over the remainder of the year? And then going forward, obviously, as credit normalizes, talk about some of the offsets for the business really in terms of less buyout activity and the potential for increased credit demand?

Steve Michaels, CEO

Thank you, Kyle. This is Steve. I'll begin, and then Brian can add his thoughts. Regarding the child tax credit, it's still early since it's only been a couple of weeks, and we don't have a lot of data yet. However, we can quickly notice shifts in customer behavior through our contact centers. In typical tax refund seasons, we see an increase in call volume when funds are deposited in our customers' accounts, and we observed similar spikes during previous large stimulus payments. Over the past two weeks, though, we haven't noticed any significant increase in contact rates related to additional payments or 90-day buyout executions. I want to emphasize that it's just been two weeks, and we'll monitor how this develops over time while seeking consumer feedback and behavioral changes. So far, there hasn't been anything to indicate a negative outcome. We view it as a potentially positive factor for our customers, assuming many of them take advantage of that credit. However, we don’t anticipate it will lead to the same level of large 90-day buyout executions that we saw with the major one-time stimulus payments. It might extend the period of increased liquidity that our customers have experienced over the last 15 to 18 months, which could reflect in continued strong portfolio performance, as we have exceeded our expectations in this area for the last few quarters. Whether this monthly refundable credit will affect GMV or address the challenges presented by reduced POS financing needs due to the absence of stimulus remains to be seen. There’s a lot to consider regarding the child tax credit, and we’ll keep an eye on it. I'll turn it over to Brian for his insights on the write-offs and 90-day buyouts.

Brian Garner, CFO

Yes. The child tax credit is expected to keep write-offs at a lower-than-historical level, which is reflected in our guidance. It's too early to determine the exact impact, so we are closely monitoring the situation. As Steve mentioned, we have observed a normalization of buyout activity compared to last year, but we are still significantly below 2019 levels. If credit conditions stabilize, I anticipate that buyouts will continue to decline as we move towards a more normal phase, as we are still above that normal state. I hope that addresses your question.

Kyle Joseph, Analyst

On the other hand, we discussed consumer liquidity earlier. Could you remind us about how the business is influenced by inflation, particularly regarding consumer credit demand during inflationary times? It would be helpful to understand the impact on the business.

Steve Michaels, CEO

Yes, Kyle, you're right. The last time there was an inflationary environment, PROG was a private company. But fortunately, for PROG and for just the industry, generally, the business has done well in all economic cycles. And over the years, let's call it, the most recent 10 years, the business has faced the opposite, which is kind of pressures from deflationary forces. And at the extreme, even the commoditization of certain items in the categories that we lease. So the reverse of that, or the other end, which would be higher prices caused by inflation, could result in more customers needing a payment option at the point of sale for their large ticket purchases versus being able to pay cash. So as you intimated in your question, it could be a removal of a headwind on demand for the product as prices increase.

Kyle Joseph, Analyst

I have one last question regarding the Four acquisition. It seems like you plan to run this as an independent company at first. Are there any potential synergies or integration opportunities? I'm considering how Progressive's database and underwriting capabilities might align with the buy-now-pay-later product.

Steve Michaels, CEO

Yes. I'm glad you asked that question, because while they will be a separate business, we will not operate them in a silo. The reason that we wanted to add this capability was so that we could serve both our retail partners and our customers better by we can offer a payment option for small dollar transactions, as well as merchandise that our retail partners offer that is currently not eligible for a lease. So as a complement to the existing lease product, we believe that the BNPL and a pay-in-Four product specifically have the potential to expand our total addressable market. So yes, I mean, the things that you hit, whether it be the decisioning capabilities, the database, and the cross-marketing opportunities, we're excited about the ability for Four to help us grow our core lease-to-own capabilities and be a lever for growth. So they will be maintained separately, but there would be cooperation and collaboration to make sure that we can add value and create increased value for both businesses and ultimately PROG Holdings.

Operator, Operator

The next question comes from Anthony Chukumba with Loop Capital.

Anthony Chukumba, Analyst

It's encouraging to see GMV growth starting with the number 2. For my first question, I'm aware it might be difficult to break this down. However, regarding the 274% online GMV growth, can you provide any insights on how much of that was due to better integration with the online point-of-sale systems of your major retail partners, compared to other factors like the plug-ins, WooCommerce, and Magento 2?

Steve Michaels, CEO

Thank you, Anthony. E-commerce is definitely a positive area for us, and we anticipate it will remain strong in the upcoming quarters. The plug-ins have great promise, although they are still in the early stages. Recent additions like WooCommerce and Magento 2 are examples of this. We have other plug-ins available as well. Most of the growth we've experienced in e-commerce GMV can be attributed to those integrations you mentioned and our larger retail partners as they implement their omnichannel strategies. There is significant potential to grow with smaller retailers and e-tailers who utilize these ready-made e-commerce platforms. However, the substantial growth for us at this time, and likely for the foreseeable future, is dependent on expanding our e-commerce market share with our large enterprise clients.

Anthony Chukumba, Analyst

You mentioned that your e-commerce GMV was 13% of Progressive Leasing GMV. What was that number in the second quarter of last year? If I remember correctly, you provided a year-over-year comparison in the first quarter. I was just curious about the comparable number for the second quarter of 2020.

Steve Michaels, CEO

Yes, it was like low 4s, 4.2% or 4.3%.

Anthony Chukumba, Analyst

Okay. And then my final question, I'm trying to think about the expanded child tax credit a bit. I heard your comments about how it probably won't lead to many early 90-day buyouts since it isn't received all in one lump sum. That makes sense to me. But how can this not help in the second half of the year, especially from a write-down perspective? If people are receiving $250 a month for every child aged 6 to 17 and $300 a month for every child under 6, how is that not going to assist with payments?

Steve Michaels, CEO

It's a valid point. In a vacuum, it would be difficult to argue against it, as there are unknowns and variables related to the reopening. We're carefully monitoring the Delta variant and the associated developments. With schools reopening and the possibility of returning to the office, there could be additional pressures. These pressures can affect income through factors like mortgage or rent moratoriums. There are many variables at play. Yes, in isolation, this could prolong a period of below-average or above-average portfolio performance. However, other factors will impact our customers' disposable income.

Operator, Operator

Our next question comes from Michael Young with Truist.

Michael Young, Analyst

I wanted to start kind of following up on the strong credit trends we've seen. Can you maybe just talk a little bit about sort of the underwriting box that you guys have now or are you kind of loosening that? What should we expect to see going forward? Or has that already sort of taken place?

Steve Michaels, CEO

Thank you, Michael. From a decision-making perspective, we've been in a dynamic position. We initially tightened our approach at the start of the pandemic. However, as we gathered data over the summer and fall, we were surprised by the positive performance of the portfolio. Starting in November 2020, we gradually began to reverse some of those tight measures. This wasn’t merely a reversal; it was an informed adjustment based on the insights we gained from the data. We made a series of adjustments from November through early Q2 of 2021. Currently, our approval rates are higher than they were before the pandemic, as are the approval amounts. We continuously seek ways to run research and development through our processes and find opportunities to say yes in a measured and profitable manner. Our data science team excels at identifying these opportunities. Right now, we have alleviated a prior self-imposed constraint from 2020 and are in a strong position. We will always prioritize maintaining control over our portfolio rather than becoming too lenient. Fortunately, we have encouraging early metrics and indicators, and since our portfolio duration is short, we can swiftly respond to changes as they happen.

Michael Young, Analyst

And then wanted to just touch on the share buyback. Obviously, you've got $300 million approved. You were active on it somewhat this quarter. About $50 million repurchased at a somewhat higher stock price than where we are today, as the stock has kind of been weaker lately. I would imagine, it looks like a good value. How aggressive are you guys willing to be maybe outside of M&A, pursuing that? And any other thoughts there?

Steve Michaels, CEO

We're fortunate to have a very capital-efficient business model, allowing us to generate cash even with strong growth rates. This situation leads us to consider what to do with what we define as excess capital. While we won't disclose our exact plans, I agree that current prices are attractive, and we will deploy the cash where we see the best return.

Michael Young, Analyst

And maybe one just quick last one. The Vive segment has done quite well here recently. Should we expect kind of that to continue or any other just comments on that segment specifically?

Steve Michaels, CEO

Yes, Vive is definitely a highlight for us and has experienced significant growth due to the increase in its partner network, including both new customers and additional opportunities within existing ones. The GMV for Vive has risen substantially. As we've mentioned previously, Vive follows CECL accounting, which can impact earnings because it requires us to estimate and account for potential losses over the life of a loan upfront when the loan is originated. In 2021, we are benefiting from lower provision rates following high provisions in 2020 due to the uncertainties brought on by the pandemic. We may see some reversal of this trend if we return to normal in the latter half of 2021 and into 2022. However, growth rates remain strong, and we view Vive as a strategic asset for Progressive. Its value has been validated, and after several years, it has become profitable. We believe that profitability will be affected by those provision rates but will persist.

Operator, Operator

Our next question comes from Bradley B. Thomas with KeyBanc Capital Markets.

Bradley Thomas, Analyst

A couple of questions, if I could. And I missed the beginning of the call, so I apologize if you addressed this in detail already. But I was hoping we could just revisit the way that GMV flows into revenue, particularly given just how strong the second quarter GMV number was? And if you could talk a little bit about how you're expecting these trends to flow through? And what maybe that could mean for potential upside to revenues in the quarters ahead?

Brian Garner, CFO

Yes, I'll address that. There are probably two aspects to consider. Gross Merchandise Value is definitely a key indicator for revenue. Revenue comes from several components, including buyout activity, as we observed in the first half. The 25.2% we recorded this quarter will begin to affect revenue in the third and fourth quarters. To reiterate my earlier comments, the total revenue for the first half and second half will likely be similar. While we’re losing the boost from buyouts, I anticipate revenue stability given the $2 trillion stimulus that occurred at the end of the first quarter, along with the buyouts associated with that. The portfolio, however, is expanding, which is driven by the GMV we witnessed that's contributing to new opportunities. So those are the elements at play. I believe viewing the revenue as roughly equal between the first and second halves is the best approach.

Bradley Thomas, Analyst

And then I imagine this may have been addressed earlier. But any more color you want to share as we fine-tune our models about how to think about 3Q versus 4Q from an earnings perspective, given some of the margin puts and takes?

Brian Garner, CFO

Yes, I believe that in the second half of the year, we will see a decline in margins. I expect the margins in the two quarters to be quite similar, with no significant variation between them. As mentioned, we will continue to increase our spending, and this could lead to a higher expense level in the fourth quarter compared to the third, as we aim to return to our pre-pandemic spending baseline.

Operator, Operator

Our next question comes from Bobby Griffin with Raymond James.

Bobby Griffin, Analyst

Brian, I just want to clarify your comments a second ago about the buyout tailwind. And maybe I'm just struggling to kind of conceptualize it. But I thought with stimulus, consumers would buy out of their contracts early, which actually decreases the yield on the portfolio. So if we have more normal behavior and less buyouts in the second half, shouldn't the yield on the portfolio and kind of the revenue growth generated from the portfolio be stronger?

Brian Garner, CFO

Yes. So I guess the question that you've got to answer is whether the portfolio strength will be at the same level that we saw in the front half? And I think the expectation is that we'll see write-offs come up. Buyouts, there's two kind of buyouts in our business. There's 90-day buyouts, which are effectively 0 margin events for us, and there's early buyouts that happen after that 90-day period that are profitable for us. So with those kind of subsiding and write-offs presumed to increase, that's where, along with SG&A continuing to increase, that's where you're seeing the margin contraction.

Steve Michaels, CEO

Bobby, this is Steve. I would just add that, like, you're right in that if a customer pays out to full term, the portfolio yield will be higher. It will just be over a longer period of time, whereas if you do $1,000 worth of GMV today and 60 days from now the customer buys it out, it's kind of like a shot to revenue in that period. So when you have elevated buyouts, it can grow revenue fairly quickly. But if buyouts subside, that particular dollar amount of GMV will generate more revenue over time. It just isn't going to influence the near-term quarters as much.

Bobby Griffin, Analyst

I would like to get some clarification regarding the expected increase in operating expenses for the third and fourth quarters. Is this mainly due to growth investments, or is it related to costs that were previously reduced during the COVID period? Also, I noticed that the operating expenses for the first and second quarters were quite stable after accounting for write-offs, at around $83 million and $89 million respectively, with a slight increase in the second quarter. However, the projected figures for the third and fourth quarters indicate a significant rise.

Brian Garner, CFO

Yes, it is. I believe we are focusing on both components. We are continuing to invest as we identify opportunities to increase GMV and grow the business. For the year, I expect that SG&A will be about the same percentage of revenue as what we experienced in 2019 before the pandemic. We are essentially returning to an annualized range that has been lower over the past year. This is why you are witnessing the increase. The 16% margins from Q1 and Q2 are not the steady state margins we are targeting. As Steve mentioned, we anticipate margins will be between 11% and 13%, and that is where we expect to be moving beyond 2021. While we are still investing, we are doing so within the limits of our historical spending rates prior to the pandemic.

Steve Michaels, CEO

The other thing, Bobby, that I would say on that is, as we said right around the time of the split is we expected at least about $10 million worth of additional public company costs that didn't exist when we were pre-split. And those hiring plans and other things take a little bit of time to layer on. And so that burden would be more back-half weighted than front half.

Operator, Operator

Our next question comes from Tim Vierengel with Northcoast Research.

Tim Vierengel, Analyst

I've got one question for Steve. And I was just wondering if you could just comment a little bit more on the e-commerce growth and penetration you're seeing there. Obviously, huge improvement year-over-year and sequentially. I'm just wondering what you think the long-term percentage you think that e-commerce should be in your business? And if there's anything we can look at to say, the lower-income consumers may be getting more comfortable transacting online than maybe they were pre-pandemic?

Steve Michaels, CEO

Thank you. I'll focus on the second part of your question. Our consumers are very comfortable shopping online, and they have high smartphone adoption and are sophisticated in mobile shopping. As you mentioned, there was a significant shift to online shopping during the pandemic that accelerated this trend. However, I want to clarify that we don't have a specific target for the portion of GMV coming from e-commerce. The customers will ultimately determine that. I anticipate that e-commerce GMV will grow at a faster rate than the overall market due to current shopping trends. We aim to provide solutions that support cross-channel or multichannel shopping experiences, and customers will decide how that GMV is allocated. Moving forward, it may become more challenging to categorize GMV since customers are likely to engage through multiple channels. Presently, we classify GMV as e-commerce if the checkout occurs through our online shopping cart, but this doesn't mean they haven't interacted with our app, products in-store, or talked to a salesperson. The positive aspect is that over half of our applications come through digital channels, allowing us to make informed decisions even when the customer is not present. Overall, I would say e-commerce GMV is expected to increase more rapidly than overall GMV, and while the composition will lean more towards e-commerce, we do not have a set target. Our goal is to offer simple, transparent solutions for customers so they can choose how they want to engage with us.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Michaels for any closing remarks.

Steve Michaels, CEO

Thank you, everyone, for joining us today and for your interest in PROG Holdings. Our team is excited about the opportunity to continue PROG's impressive history of growth and innovation. I'd like to add a special welcome to the team members from Four. We're excited to have you as part of the PROG family. And again, I'd like to thank all of PROG Nation for their tireless efforts to innovate and simplify on behalf of our customers and retail partners. And we look forward to updating you again next quarter.

Operator, Operator

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