Sezzle Inc. Q1 FY2024 Earnings Call

Thank you. Good afternoon, everyone, and welcome to Sezzle's 2024 First Quarter Earnings Call. My name is Charlie Youakim, I'm the CEO and Executive Chairman of Sezzle. I'm joined today by my Co-Founder and President, Paul Paradis, our Chief Financial Officer, Karen Hartje, and our Head of Corporate Development and Investor Relations, Lee Brading. In conjunction with this conference call, we filed our earnings announcement with the SEC and have posted our earnings presentation on our investor website. If you haven't already, please check the Investor Relations section of our website, where you can find the press release and earnings presentation under quarterly earnings in the financial section. Now that we're set, let's begin. We have experienced a series of exceptional quarters in our brief history, and I believe this quarter is among the strongest we've had so far. Let's move into the presentation, starting with the left side of Slide 3. Q1 was another robust quarter with top-line growth, as total income rose by 35.5% compared to the same quarter last year. Our net income for the quarter was $8 million, surpassing the $7.1 million of net income we reported for all of 2023. This puts us at nearly 50% of our guidance for the year, which means we're raising our 2024 guidance, and I will elaborate on that shortly. The $8 million in net income reflects a 17% net income margin and resulted in a 31% return on equity for the quarter, which is not annualized. Our total subscriber count reached 371,000 by the end of the quarter, reflecting a net increase of 64,000 subscribers during this time. Additionally, we reported $15 million in adjusted EBITDA compared to $8.3 million in the previous year, with a margin of 31.9% for Q1. Consumer engagement remains high, with the top 10% of consumers making an average of 53 transactions per year. As mentioned earlier, we are increasing our net income guidance for the first time and are introducing EPS guidance for the first time as well. We are raising our GAAP net income guidance for 2024 to $30 million from $20 million and providing GAAP EPS guidance of $5 for 2024. On past calls, we have discussed the rule of 40 and how companies can define profit margin differently, from adjusted EBITDA margin to net income margin. We are pleased to report that we exceeded the rule of 40, no matter how you look at it. If you take the stringent measure of the rule of 40 using revenue growth and net income growth, our net income margin was over 50% for the quarter. Using revenue and EBITDA margin, we were above 67%. We also mentioned our goal of achieving 20/60/20, which corresponds to surpassing a 20% revenue growth target, a 60% gross margin target, and a 20% net income margin goal. In Q1, we are getting closer to meeting that overall 20/60/20 goal with a 35.5% revenue growth, a 55% gross margin, and a 17% net income margin. Given our recent successes, we frequently receive inquiries from bankers, analysts, and investors about how we managed such an impressive turnaround. Our success was not immediate and required creativity, dedication, and hard work from every employee at Sezzle. At our core, every decision we make is guided by principles laid out on Slide 4, starting with the goal of positively impacting profitability. We no longer pursue growth for its own sake, as our results illustrate. A critical aspect of profitability is enhancing the lifetime value of our consumers. The launch of our Premium and Anywhere subscription products exemplifies our focus on increasing LTV while creating beloved products. While this may not be evident in our absolute numbers, we are committed to acquiring new users, but first, we prioritized profitability. Over the next 6 to 18 months, we have multiple initiatives aimed at driving user acquisition, from marketing campaigns to product offerings. Lastly, from a stakeholder perspective, while generating profit and bottom-line results is important, we also recognize the need to be responsible stewards. We take pride in being the only buy now, pay later company that is a certified B Corp, which emphasizes our commitment to being good stewards for future generations. We anticipate renewing our B Corp status this summer. As previously stated, we have exceeded 371,000 subscribers for our Premium and Anywhere products. As depicted on Slide 5, the level of engagement and positive feedback has been remarkable. Consumers have embraced the flexibility of Anywhere, with approximately 32% of orders generated from virtual card use at point-of-sale retailers. These are in-store transactions. Subscribers are making an average of six more purchases per quarter compared to nonsubscribers, which contributes to increasing consumer lifetime value. Furthermore, our new members are shopping at a wider variety of locations and making everyday purchases at general merchandise retailers, grocery stores, and restaurants to fulfill their discretionary needs. A recent article noted that buy now, pay later seems to be a modern adaptation of credit in the evolving landscape of consumer finance. Again, referring back to our mission, through these subscription services, we continue to financially empower the next generation throughout their life journeys, and our NPS scores for Anywhere and Premium track positively. We observe higher customer NPS for Anywhere compared to Premium, which we attribute to the greater flexibility of Anywhere as a consumer product. We are enthusiastic about the future and are not complacent. As illustrated on Slide 6, we recently introduced Payment Streaks for consumers. We have essentially gamified payments by rewarding positive behavior, which aligns with our commitment to improve the consumer experience and promote financial responsibility. It’s still early to provide insights on this since we just launched the product in the last few weeks, but we will closely monitor the impact of Streaks. We believe that the new tiering system and gamification of Streaks will elevate the consumer experience and aid in retention as natural segmentation will occur within our consumer base based on tier performance. We are also making significant strides in our marketplace expansion with direct product listings. While still a work in progress, we observe that it enhances engagement through clicks and app sessions, ultimately leading to better financial outcomes and higher consumer retention. Like Payment Streaks, many of the recent improvements are too new to share measurable results at this time. Our bank partnership continues to develop positively, and we anticipate a strong relationship with our future partner. Our entire organization is engaged in completing the final steps of our prelaunch engagement. The primary initial advantage of the bank partnership is the banking-as-a-service relationship, which will enable us to standardize our product offerings nationally instead of operating state-by-state. The current state-by-state approach has limited our profitability due to certain states' strict lending regulations. For instance, some states prohibit any late payment fees, while others restrict the amounts and timing of those fees. These varying laws have complicated our operations and constrained the profitability of our products. Through the bank partnership, we will have a national banking charter to support our products, helping us mitigate these restrictions and boost profitability. Additionally, this partnership will facilitate the launch of new products deemed essential for future user acquisition and maximizing customer lifetime value. The anticipated benefits of this banking partnership are not included in our updated guidance, and we cannot disclose the specifics of the expected impact as we maintain a conservative approach with these projects. We prefer to actualize the benefits before adjusting our internal budgets and guidance. We also won't provide guidance on the timing of this launch, as some elements are beyond our control. Slide 7 presents examples of our marketing endeavors. For those who may be unfamiliar, our early marketing efforts were entirely aimed at merchants. While the majority of our spending remains focused on merchants, we are expanding our consumer marketing, as depicted on Slide 7. Our marketing team is innovative, and I look forward to their future initiatives. All marketing efforts are evaluated based on CAC to LTV ratios. Our positive results and momentum are further demonstrated in key non-financial metrics shown on Slide 8. It is encouraging to see continued growth in subscribers, increased repeat usage, and improved consumer purchasing activity in both frequency and total order count. The success of Sezzle Anywhere, launched in June 2023, is evident as shoppers have utilized it widely. In Q1, shoppers engaged with us at over 149,000 merchants, compared to just 22,000 in the prior year. It’s fulfilling to see Sezzle integrated into people’s everyday lives. Year-over-year, we noted a drop in active consumers, but the number has remained flat since August. As mentioned last quarter, we believe this decline has stabilized, and we are optimistic about a rise in active consumer numbers in the latter half of this year. With that, I'd like to hand the call over to our CFO, Karen Hartje, to go over the quarterly financial results in more detail. Karen?

Thank you, Charlie, and hello to all. On to Slide 9. As referenced several times already, we had a very good start to 2024 as reflected in our year-over-year results. Total income increased 35.5% year-over-year, led by a 33% increase in UMS. Net income came in at $8 million for the quarter compared to $1.7 million the previous year. The improvement was driven by a combination of driving top line growth through UMS growth and subscription sign-ups while also lowering operating expenses. Those actions are further reflected in our EBITDA margin of 31.9% and our non-transaction-related costs declining to 34.5% of total income compared to 55.7% in the prior year. As shown on Slide 10, we typically see a drop-off in UMS from fourth quarter to first quarter due to seasonality. The seasonal drop-off in UMS was consistent with what we have experienced in the last couple of years. However, I would like to note that we did not see that same drop-off in total income, which only fell 3.9% from fourth quarter to first quarter as we had a pickup in subscriptions during the quarter. The combination of UMS and subscription growth drove total income higher year-over-year by 35.5%. On Slide 11, transaction expense, which is primarily payment processing costs, rose to 2.4% of UMS. Although we did see an increase partially attributable to our average order value declining during the quarter compared to the prior year, we believe we can lower this back to recent historical levels as a percentage of UMS. Seasonally, the first quarter is a healthier quarter for a provision because of the tax refund season. We do expect the provision for credit losses as a percentage of UMS to rise over the remainder of the year as it did in 2023. However, we expect it to remain within a reasonable level as we continue to evaluate the balance of growth versus losses. Led by the increase in provision year-over-year, our transaction-related costs, as shown on Slide 12, rose to 44.7% of total income. Nonetheless, as reflected on Slide 13, we were well above our 2024 guidance of total income less transaction-related costs of 50%. In case you haven't figured it out by now, we are not all about growth at any cost. On Slide 14, you can also see that we are hyperfocused on expenses. Not only were we able to grow the top line by over 30%, but we were able to lower non-transaction-related operating costs on an absolute basis by $3.1 million, representing over a 15% decline year-over-year. The line graph on the right side of Slide 14 reflects how the combination of our unit economics and expense management are driving strong bottom line performance. Speaking of bottom line performance, turn to Slide 15. The evidence is in the results, $8 million of net income and $15 million of adjusted EBITDA. In 2024, we have also improved our liquidity position and solidified our capacity for further growth as evidenced by our new credit facility highlighted on Slide 16. Subsequent to quarter end, we closed on a new $150 million facility with Bastion, a longtime lending partner for Sezzle. The new facility increases the size of our credit facility and significantly lowers the interest rate cost from SOFR plus 11.5% just over plus 6.75%. We expect to significantly reduce interest costs going forward as the facility has a lower borrowing rate and a lower minimum utilization requirement. All paths lead us to continuing to improve and strengthen our balance sheet. Slide 17 reflects the positive impact our bottom line performance has had as stockholders' equity stands at $29.6 million, and we have built an unrestricted cash position of almost $78 million compared to only $59 million at this time last year. At this point, I imagine everyone is treated and looked ahead to our outlook on Slide 18. I know I would have by now. We are happy to update previous guidance and provide some additional guidance as well. We now anticipate our total income growth rate for 2024 will be approximately 25%, resulting in total income of $200 million compared with our previous guidance of 20%. We still expect total income less transaction-related costs to come in around 50% for 2024. Meanwhile, we are upping our GAAP net income guidance to $30 million from $20 million. We expect our new GAAP net income guidance to result in GAAP EPS of approximately $5. At the bottom of Slide 18, we've added a valuation metric based on the ratio of our market cap to our 2024 earnings guidance and compared it to the same metric using the consensus for other popular indices. I'm sure you get the point without us stating it. We are not happy with our valuation as we are trading at less than half of the valuation when compared to these indices. As we are hyperfocused on being profitable, we are hyperfocused on enhancing shareholder value. In addition to the $5 million stock repurchase plan we announced in December 2023, we will evaluate other capital return options for shareholders, including, but not limited to, dividends, incremental share repurchases or a combination of both. With that, I would like to turn the call over to the operator as we are happy to take your questions.

I reviewed your earnings report and thought the last report was good, but this one was exceptional. Congratulations on that achievement. Thank you for providing the earnings per share guidance; it really helps highlight how undervalued your stock is. That's a valuable addition to the presentation. Can you share any details about the stock buyback, specifically the average price per share that was paid?

Karen, do we have that detail outlined anywhere?

At this point, we have repurchased $3.5 million worth of stock.

I was just curious. So out of the $5 million, you bought back $3.5 million. I was just curious if you add on it and what you were paying per share on average?

Nico, I think you'll see that in the 10-Q. I mean, it shows the detailed view in there.

All right. Very good. I asked the question, but just to clarify for anyone else listening, you mentioned warrants during the call. I'm curious if there is anything outstanding that would be significantly dilutive if exercised.

I'll take that one. We have about $54,000 in warrants. They're already reflected in the diluted share count, and that's less than 1%. So no, it's not significant.

I'm noticing a nearly 10% increase in the number of diluted shares outstanding compared to last year, from about 5.55% to nearly 6%. Can you explain what led to this rise in diluted shares?

Karen, do you want to take that?

Well, it includes both warrants and employee options, and there are more options in the money compared to year-end at this point because of the increase in our share price.

So your $5 a share earnings guidance is based off of, we'll call it, roughly $30 million of net income divided by almost $6 million shares. Is that the math that you're doing?

Exactly.

You mentioned some of this, but it's surprising to see how profitable you are, especially when you compare yourselves to another firm that just reported large operating income losses. While you touched on this, my question is how you maintain such high profitability when others in the same industry are struggling, even if they have different revenue models. I wish I could ask this more clearly, but could you elaborate on how you've managed to generate significant net income from your revenue base while others are having a hard time making a profit?

I think each company probably has a different strategy of how to approach things, depending on their cash balances, et cetera. Our view, though, was we just kind of talked under the basics of the company. And I'm like, in our view is, you've got a lemonade stand, let's make sure that we've got a great lemonade. And we've got some great profitability on that lemonade before we start to sell it to the masses and really expand operations. And so we spent the last couple of years doing that, making sure that we've got great lemonade. We've got some great profitability on it. And now we want to really hit the gas, where I think some other companies view it as, let's just keep our hitting the gas and building an airplane while we go, and we just don't believe that's the right approach. We think the safe approach is making sure that you've got everything in order before you start to really expand it.

Is there an opportunity now for you to hit the gas without sacrificing the profitability metrics that you've built here?

Yes, absolutely. I mean our view is that we keep on working on lifetime value, increasing the lifetime value of the customer. And then what that does for us is we have this symbiotic relationship with merchants where we're helping them with their sales on their sites. We're also driving traffic to their sites. So we've got this fantastic symbiotic relationship with merchants. And what we can do, though, is be more aggressive with them as the consumer lifetime values of the Sezzle customer continue to increase post that purchase. So our belief is that we can continue to have strong growth while maintaining strong profitability goals of the company.

That's a good transition into discussing the Walmart situation, where it appears they are looking to handle things internally. My follow-up question is whether you have a significant partnership that would result in a substantial loss if this approach became widespread. Additionally, do you anticipate that large retailers will attempt to manage this on their own? Furthermore, could this lead to potential acquisition opportunities in the future, where a company might consider buying you to integrate into their existing operations?

Personally, I don't think so, Nico. I think that the Walmart situation is quite unique, and we're not highly concerned because we don't have a direct relationship with Walmart. I think this is going to be few and far between. I mean, I always talk about internally in the company, I always talk about private label credit cards as the precursors to what we're doing with merchant relationships, et cetera. And in that private label world, you find that almost no retailers do their own private labels. They work through banking partnerships. And I think that buy now, pay later will kind of follow that same path. So I think this will be unique. And then on the M&A, you just never know on M&A. We basically build a business to build a great business and right, don't really focus on that.

Can you provide more information about the Canadian opportunity? Are the same competitors involved, and can you share any additional insights on this opportunity?

Yes, I would actually suggest that investors check the app stores in Canada and review the competitor accounts. Not all competitors from the United States operate in Canada, and we've observed that their offerings there tend to be weaker due to a lack of focus in that market, while we strive for parity in our product offerings. We consider this an essential aspect of our overall business. Therefore, I believe we have achieved a greater level of success and size in Canada compared to the U.S.

Okay. Very good. Last question is it looks like you're sitting on a really solid balance sheet right now. In terms of the cash, are there investments that can be made to help with the growth story? Is this an appropriate number to be sitting on? It seems like you've been generating and adding to the cash position. I'm just curious what the end use is or what the end game is?

We'll never make a hard rule about anything. I think our view is to keep on piling on cash with profitability. And then if we find an opportunity where the ROI makes sense, we'll take a deep look at it. Just like we do with our marketing initiatives. We're always looking at CAC to LTV ratios. Does this make sense? What we tend to find is that the merchant relationship is still by far and away the best relationship for us, and it makes sense because of the symbiosis of the relationship. So we look at return. And I think we've looked at return with our cash; if we can find some return for it, we'll definitely take a look.

Okay. Congrats again on the quarter. And any way I look at this and try to work the numbers, I mean, I'm getting close to a $1 billion valuation; you start overlaying even conservative metrics. And so I really look forward to continuing to own the company here, and I'll jump back in the queue here.

Thanks, Nico. Thank you. In closing, I'd like to thank the Sezzle team again. We continue to all roll in the same direction, which is leading to these great results. This quarter, I'd also like to send a special shout out to the product and engineering teams as much of what we're seeing in these numbers is due to the amazing and innovative work created by those teams over the last two years. Great job to you all. And in honor of the late Charlie Munger, I'd also like to thank the true investors out there that follow us and sit on your ask method to investing with Sezzle and have invested and held our shares through it all because of their belief in what we're doing as a company. Please know that we keep you in mind as we continue to innovate and deliver. Thank you all, and have a great rest of your day.

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