Sezzle Inc. Q1 FY2025 Earnings Call

Good afternoon, and welcome to the Sezzle Inc. First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference to Charlie Youakim, CEO. Please go ahead.

Thank you, and good afternoon everyone, and welcome to Sezzle's first quarter conference call for 2025. I'm Charlie Youakim, CEO and Executive Chairman of Sezzle. I'm joined today by our Chief Financial Officer, Karen Hartje; our President, Paul Paradis; and our Head of Corp Dev and IR, Lee Brading. In conjunction with this conference call, we filed our earnings announcement with the SEC and posted it and the earnings presentation on our investor website at sezzle.com. To retrieve the documents, please go to the Investor Relations section of our website. There you will find the press release and the earnings presentation under the Investor Relations section. Please be advised of the cautionary note on forward-looking statements and the reconciliation of GAAP to non-GAAP measures included in the presentation, which also covers our statements on today's call. I'm looking forward to discussing our first quarter results with you all as this quarter marked the 12th straight quarter in which we have posted positive year-on-year improvements in revenue and operating income. It's an exciting time for the payments industry and especially buy now pay later, as our sector continues to grow and gain market share. Even as we're gaining on other payment methods, we still represent less than 10% of the payments market. We believe that our sector will continue to gain share as we gain share within it. We also believe that it is a great time to be in the buy now pay later space as there is a heightened level of uncertainty in the economy. Consumer sentiment is dropping, and many consumers seek out flexibility in their finances in uncertain times. BNPL provides that desired flexibility and allows payments to be matched to budgets. We have said this before, but we will say it again now, BNPL is aligned with responsible repayment. Consumers must be current with us or they aren't allowed to continue to use us as a payment method. BNPL is very different from a revolving line of credit on a credit card, where large overdue balances can be pushed into the next cycle, accumulating large fees and high APRs, leading to a cycle of never-ending debt. We love that we're on the right side of responsible payments. Looking at our first quarter results, we continue to defy those who say we can't compete with larger, better capitalized competitors. We are doing more than just competing; we are thriving and winning. It turns out that innovation and efficient operations can still produce great returns. Seasonally, the first quarter tends to be our strongest in terms of revenue as a percentage of GMV, as the revenue recognition on payment plans initiated in the fourth quarter rolls into a seasonally lower GMV first quarter. Our provision for credit losses also tends to be improved in the first quarter versus the fourth quarter. The combination of the seasonally better payment trends in the first quarter and a better-than-expected repayment performance on GMV originated in the fourth quarter led to outsized gross margins and in turn outsized net income margins. We will dive deeper into each of these in our presentation. Adding to our strong performance was the launch of our banking partnership with WebBank in September last year. This quarter was the first quarter that we began to see the full benefit of our partnership with them. You can see how it all came together on slide 3, where we provide a snapshot of our first quarter results. GMV rose 64% year-over-year, well outpacing the overall BNPL industry. Revenue increased 123% year-over-year, driven by a 77% year-over-year growth rate in our monthly on-demand users and subscribers, which we call MODS. These strong top-line results coupled with a 70.4% margin for our unit economics and our ability to continue to leverage non-transaction related costs led to a net income of $36.2 million for the quarter. Yes, as you might have guessed, we are bumping up our guidance for 2025. I don't want to steal Karen's thunder on our revised guidance. But as you can see here, we're increasing our 2025 net income guidance by almost 50% to $120 million from $80.4 million and bumping up the 2025 EPS guidance from a split adjusted $2.21 per share to $3.25 per share. We continue to significantly outperform the Rule of 40 and our similar version, the Rule of 100. Actually, I think we posted a score of over 200 on that metric. We grew revenues by 123% with a gross margin of 70% and a net income margin of 34.5%. That's a total of $227.5 million. Wow. That will be tough to beat. We're going to keep on trying now. Look, at the end of the day, we're going to keep letting our results do the talking even if some folks in the market might not be fully appreciating what we're building here. We are constantly working to enhance our consumer experience. Proof is in the pudding as our consumer purchase frequency and repeat usage have risen every quarter since the launch of our subscription products in 2022. We're particularly excited about a couple of new product enhancements that are currently in beta stage, Pay-in-5 and Auto-Couponing. We've also stepped into some capital markets activities as another way to enhance shareholder value. As many of you know, our team makes up a large portion of the shareholdings. And with that, we're quite aligned with many of you listening to the call. During the quarter, we announced a $50 million share repurchase program, which went into effect after quarter-end. We also completed a six-for-one stock split to make our shares more appealing and accessible for investors, with the mindset that this will help increase liquidity in our stock. We believe both decisions are smart capital markets moves. On Slide 4, you can see in greater detail some of the product tools we are adding. Our product focus with consumers has been in two areas: financial tools and shopping features. We believe it is critical to give consumers as many financial options as possible. 'One size does not fit all'. Providing consumers with more shopping tools, such as a shopping browser extension, price comparisons on products, and auto couponing, is all done with the mindset of increasing the value provided to our consumers which, in turn, should increase retention and loyalty. These are each very early in their rollout to consumers, so we don't think we will begin to fully experience the impact until Q3 at the earliest. Speaking of rollouts, we are in the early stages of on-demand and what we refer to as MODS, as shown on Slide 5. MODS were up 77% year-over-year to 658,000 and down sequentially from Q4, consistent with the seasonal drop in GMV activity from Q4 to Q1. We are excited about how well on-demand is performing as a new product in our product suite. And we expect it and our subscription products to continue to be the drivers of growth for the company. As shown on Slide 6, we continue to see better year-over-year engagement and performance on a number of metrics. What's exciting to see is that our connection with the consumer is growing. We are becoming an everyday go-to product for them. The average quarterly purchase frequency increased from 4.5 times to 6.1 times per quarter. Repeat usage increased 60 basis points, and our active consumer count rose by 5.4% year-over-year. I love seeing that subscribers are taking us everywhere, as they shopped at 346,000 unique merchants during the quarter. Our sales team continues to focus on integrating with enterprise-level merchants. We signed three in Q4 and added two more signings in Q1, SCHEELS, a Midwestern sporting goods store, and WAP.com, a social commerce platform. We are starting to see the positive momentum from our sales team as evidenced by our signings but more importantly by the level of discussions and pipeline development we are seeing with a variety of significant merchants. On Slide 7, you can see that even with the seasonal drop after the holiday season from Q4 to Q1, we still experienced sequential improvements in quarterly purchase frequency, active consumer count, and the number of unique merchants shopped at by consumers. I'm happy to point out that our active consumer count rose sequentially for the fourth straight quarter. With that, I'm happy to turn the call over to our CFO, Karen Hartje, who will go over our quarterly financial results in greater detail.

Thanks, Charlie, and hello to everyone joining us today. Diving into our first-quarter numbers on Slide 8, you'll see the momentum continues. We're maintaining our upward trajectory with another strong quarter fueled by disciplined growth, improving unit economics, and the expanding impact of our Bank Program. As Charlie mentioned at the start, we easily met the Rule of 40, and for that matter, our own Rule of 100. Total revenue increased 123% year-over-year to $104.9 million, and our adjusted net income grew 286% year-over-year to $36.1 million. The substantial acceleration of growth rates at the top and bottom lines is meaningful, reflecting stronger monetization per dollar of GMV, thanks to both our MDS Program and the unified fee structure under the Bank Program, all while keeping our expenses in check. Slide 9 shows our GMV and revenue yield in action. Total revenue surpassed our fourth-quarter holiday shopping period, with our take rate rising to 13% of GMV. Our take rate tends to take a step up from Q4 to Q1 as GMV tends to dip after the holiday season, but we still have the seasonal spillover of payment activity from the fourth quarter that occurs in the first quarter. Additionally, strong subscriber engagement and a full-quarter impact of our partnership with WebBank drove total revenue yield to lead sequential quarter-over-quarter growth, despite the seasonal drop in GMV. On Slides 10 and 11, we break down our transaction-related costs, transaction expense, provision for credit losses, and net interest expense. As you can see in the breakdown, our transaction expenses substantially benefited from our provision for credit losses, as we realized better-than-expected consumer repayment behavior. We remain focused on driving more consumers through the funnel, and we still expect the provision will trend higher over the remaining quarters of 2025 within our guided range of 2.5% to 3%. Alongside our provision, transaction expense and net interest expense as a percentage of GMV held steady sequentially at 1.9% and 0.4%, respectively. Year-over-year, both metrics improved as a result of an optimized transaction processing strategy and our new debt facility that went live last April. Given the current volatility and uncertainty in the market, I want to emphasize the strength of our business model as seen on slide 12. Since our turnaround in late 2022, our margins have drastically improved with our trailing 12-month total revenue less transaction-related costs as a percentage of total revenue growing 11.9 percentage points to over 60% for the last 12 months ended in March. The margin expansion occurred while we've accelerated our volume growth and expanded our risk tolerance. And the critical factor giving us comfort in an uncertain market is the rapid portfolio turnover with our loan tenor being approximately 42 days and the first loan cohort quality reading two weeks after its origination, meaning we can pivot fast, much quicker than other consumer loan businesses. We're well positioned for whatever lies ahead. To wrap up this point, you'll see on slide 13 that total revenue less transaction-related costs grew nearly three times year-over-year to $74 million, representing 70.4% of total revenue. As previously stated, stronger-than-expected consumer credit performance drove the outperformance for this quarter. Jumping to slide 14, we continue to stay the course to widen our gap between our total revenue less transaction-related costs and our non-transaction-related operating expenses consisting of personnel data and third-party tech marketing and G&A. Our discipline across all categories, including the deliberate expansion of marketing expense to accelerate growth, leaves us well positioned to leverage our existing infrastructure and continue this trend. And now our favorite topic here at Sezzle, our profitability as seen on slides 15 and 16. All prior components outlined resulted in first quarter '25 net income reaching $36.2 million with our net income margin expanding to 34.5%. Additionally, adjusted EBITDA margin jumped to 49%. Our ability to drive consistent margin performance while growing revenue at this pace validates our strategic plan and reflects the strength of our current business model. And the stability this provides to our balance sheet is particularly noteworthy, as shown on slide 17. Cash and cash equivalents grew $15.7 million quarter-over-quarter, all while we reduced our usage of our line of credit with quarter end incremental borrowing capacity of $52.2 million. As a cash-generating business, we believe it's important to highlight our cash from operations, which grew nearly $20 million year-over-year to $58.8 million for the first quarter of 2025. This provides us with the flexibility to return capital to shareholders like our recently announced share repurchase program while also maintaining liquidity for growth investments. Finally, let's look forward. We are excited to announce that we're raising 2025 guidance across the board, increasing top line revenue growth from 20% to 30% to 60% to 65% and earnings per share from $2.21 to $3.25. I know that's a significant adjustment especially when you see many companies out there pulling back on guidance completely. So, let me walk you through why we're confident about the adjusted outlook. It's important to start by calling out the tailwinds leading to our $36 million net income quarter. First, demand remained strong in the first quarter which is usually one of our softer quarters. Second, credit performance surpassed our expectations with the provision for credit losses as a percentage of GMV coming in well below our stated expectations. Lastly, the interplay between our subscription and on-demand products has exceeded our expectations. We expected to see a balance between the cannibalization of subscription and adoption of our on-demand product; yet our subscribers are holding up and even using the product more frequently, and non-subscribers continue to engage with our on-demand product. We expect this positive trend to continue, providing a strong tailwind for 60% plus top line growth. That concludes the financial section. And with that, I'll turn it back over for Q&A.

We will now begin the question-and-answer session. Our first question will come from Hal Goetsch with B. Riley Securities. You may now go ahead.

Thank you. Congratulations on a great start to the year. My first question is about your pipeline of new merchants. Can you share what types and sizes they are? It seems to me that the buy now, pay later space is really expanding. I'm curious about the kinds of retailers that are interested in partnering with you or that you are reaching out to.

Thanks Hal. Yes. So the funnel is great. Obviously, we can't announce any names in our funnel and our pipeline. But we tend to focus more towards enterprise-level merchants now, although we do have a midsized funnel as well. But many of those merchants tend not to be like the more name brands that you would ever announce. So, even as we sign and close those midsized deals, you're not seeing a lot of those announcements or you probably won't. But it's definitely a focus towards the larger side of the equation. I don't know Paul, do you have anything to add on that?

Yeah. I think that's right, Charlie. I would add that we are starting to push into new categories where BNPL has been late to be adopted. If you go back to the start of BNPL it was heavy in discretionary categories, but we're seeing a push in categories like grocery bills. So we're starting to make headway in some new categories that are new to our industry in general as well.

Okay. And when you find these new verticals, are you the solo logo on it? Or are you another choice for BNPL from another provider that's well known?

Paul, do you want to answer that?

Yes. Typically what happens is a merchant will want to test the waters with one BNPL provider first and you'll sign an exclusive contract with that merchant for a period of time. And then once that contract is up, sometimes they'll re-up, but sometimes they'll look to add additional providers so they can capture the loyal customer bases of different providers. So we are starting to see more and more merchants adding more BNPL providers since we have our own captive user bases.

Okay. For my last question, I’ll return to the queue. Can you share what kind of frequency or uplift you're seeing from on-demand? You're about two quarters into this. Can you provide more details on what you're experiencing with on-demand specifically from monthly subscribers who are paying a monthly fee?

Yes. I would say that what we're seeing is monthly sequential growth right now, which tells you we've got really a winner of a product on that. And the other thing that I think is attractive with on-demand is that on a per user level, like the gross margin per user at the same cohort stage seems to be relatively similar to premium in one of our existing subscription products. So it has a lower barrier to entry which allows us to bring more consumers into the funnel, which we love. And then once we've got them in on demand and using us, that's where we're starting to use the opportunity to start to market our subscription products for them. Like if you're using frequently, maybe you want to just sign up for the subscription because it's a better bargain for you.

Okay. And I guess one last question on the notes receivable. It looks like despite this growth your outstanding, kind of, fell. I guess, maybe December is a back half loaded kind of month where you have a little bit more seasonally higher receivable balance on December 31 and maybe a more even pace of spending throughout the first quarter?

Yes, I think that's some of it. Karen, do you have anything to add on that or...

No, I believe we experienced significant receivable growth in the fourth quarter due to the holiday season. Payments related to that are coming in during January. Therefore, early in the first quarter, we typically see a strong influx of payment receipts influenced by seasonality.

Yes. Okay. Because this looks like you generated a ton of free cash flow in the first quarter when those payments came in. Sorry.

That's typical of our quarters.

Yes. Sorry. Thank you. Good luck. Good job.

Thanks, Hal.

Our next question will come from Mike Grondahl with Northland. You may now go ahead.

Hey, guys. Thanks and congrats on a very robust quarter. A couple of questions. Are you able to quantify or give us a sense of the WebBank partnership and the financial benefit you saw there having a first full quarter?

I think the best way to assess this is to look at year-on-year differences in the company's profiles. If you compare the fourth quarter of last year to the first quarter of this year, and perhaps look at a couple more quarters, you'll begin to see how WebBank is assisting us. The main point is to evaluate our revenue yield as a percentage of GMV, which is significant because there were several states where we were not operating at full capacity as we expanded state by state. With WebBank, we effectively ran the product as intended through the web, offering the lending product instead of Sezzle. That’s where you can observe a considerable portion of the difference. I realize it’s not a perfect comparison since we have other products involved, but you’ll get a clearer picture when looking at year-on-year data.

Got it. Got it. And then - the 658,000 of on-demand and monthly subscribers mods now you talked about the stickiness of those monthly subscribers. What would you attribute that stickiness to your shopping experience just the overall consumer experience? It sounded like you were surprised by how strong how sticky the monthly paying subscribers were. So just like a little more color there.

I often think about the early days of credit cards when considering our situation. Initially, credit cards had a similar dynamic to the early buy now pay later options. For instance, if you had a Chase card and walked into a restaurant that only accepted American Express, you would need to have an Amex card to make a purchase there. In the early days of buy now pay later, it was similar; you needed to use Sezzle at some stores while other stores required our competitors, which could be frustrating for customers. However, with our subscription product and the new on-demand feature, we simplify the experience. Customers no longer need to worry about which payment method a store prefers; they can simply use Sezzle. I find it convenient because I appreciate how Sezzle works, including the app and its features. Customers can easily make payments without overthinking, whether they are using anywhere, premium, or on-demand options. This enhances the overall usability for them, adding value, and now they can use that card wherever they go, similar to how people prefer to use the same credit card everywhere without giving it much thought.

Fair, fair, okay. And then I get asked a lot about credit quality. The 1.6 was nicely lower than where you guys were thinking it was going to be. And I know you've loosened credit quality, and clearly we've seen that in the volume. Could you just talk about how you're managing credit quality? I think that would be helpful. And then I have one more after that.

Yes, our profitability has improved significantly year-over-year, and we are aiming for a gross margin around 60%. With an increased top line, we can absorb slightly higher costs while still achieving our desired gross margin and cost PLR. This gives us more flexibility, but we are not focused solely on increasing volumes; our approach is centered on ROI and sustaining our preferred gross margins. This is likely the reason for our current standing. Additionally, in the first quarter, we always have some provisions to account for expected loan losses. We experienced better-than-expected results, which contributed to the 1.84 PLR for the first quarter as we adjusted for outcomes that surpassed our forecasts. The first quarter tends to be favorable for our customers due to tax refunds, which also influenced our results. We have provided guidance of 2.5% to 3% PLR for the year and are currently maintaining that outlook, even though the first quarter results came in lower than anticipated.

Got it. And then just lastly, could you give us a little bit of color about Pay-in-5 and auto couponing, just describe those at least?

We conducted a survey among our customer base and BNPL users outside of it, asking them to compare Pay-in-5 with Pay-in-4. While it may seem obvious that some would prefer an additional payment option, the feedback was surprisingly positive. Much of our business is driven by common sense, and when both current and potential customers express interest in a product like this, we listen and implement it. So far, the results have been promising, although it's early days and it represents less than 10% of our volume. Essentially, we have shifted from a 6-week product to an 8-week product with lower payment amounts, which customers seem to appreciate. We'll continue to increase the Pay-in-5 volume as long as we see positive results in profitability, repayment, and customer uptake. Regarding auto couponing, our goal is to enhance the customer experience, particularly for our mid to low-income younger customers. If we can surprise them with a coupon they didn’t know about while they’re shopping, it fosters loyalty and encourages them to stay within our ecosystem. Our current focus is on delivering value to customers in the Sezzle ecosystem rather than on profitability from the shopping side.

Fair enough. Thanks guys.

This concludes our question-and-answer session. I'd like to turn the conference back over to Charlie Youakim for any closing remarks.

Thank you, operator, and a big thank you to the Sezzle team. We continue to perform at a high level, which is reflected in our results. In closing, as a nod to Warren Buffett in light of his upcoming retirement, I want to share a story about him. In the early 1960s, American Express faced a significant scandal when a company called Allied Crude Vegetable Oil used fake collateral, barrels filled mostly with water, to secure millions in loans from banks using Amex's letters of credit. When the fraud came to light, Amex's stock plummeted over 50%, and many thought the company could fail. However, Warren remained calm and investigated further. He found that, despite the scandal, the core Amex business was still performing well. He spoke with bank tellers, officials, credit card users, hotel staff, and restaurant employees to gauge usage. His research led him to realize that while Wall Street had battered Amex's stock price, its reputation remained intact among the general public. This insight prompted Buffett to make a substantial investment in Amex at that time, around $20 million, representing over 40% of his fund and roughly 5% of Amex's market cap. The result was a tripling of Amex's stock price within a few years, making it one of Buffett's first major successes. His lesson — the stock market serves as a mechanism that transfers money from the impatient to the patient. Cheers to the patient long-term holders of Sezzle. Have a great evening everyone, and thank you, operator. We'll conclude the call now.

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