Earnings Call Transcript - SEZL Q2 2025

Operator, Operator

Good day, and welcome to the Sezzle Inc. Second Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Charlie Youakim. Mr. Youakim, the floor is yours, sir.

Charles G. Youakim, CEO and Executive Chairman

Thank you. Thank you, and good afternoon, everyone. Welcome to Sezzle's Second 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; 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. 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. It's exciting and fun at the moment at Sezzle as we continue to disrupt the existing payments industry. I'm sure you've noticed it just like we have as it seems like there's an article coming out every other week in a major publication talking about the growth of BNPL and its impact on the world. Some of these publications get it and understand that this product helps consumers budget and manage their spending. And others don't and just regurgitate the standard consumers using credit is bad mantra that's been out there since the invention of the credit card. Even with the negative press, we're happy as it means that we must be doing something right as we are upsetting the traditional norm. We are getting noticed. With that credit mantra in mind, we do think our path somewhat mirrors the original buy now, pay later product, the credit card. Credit cards first emerged in the 1950s. Now I imagine most of the people on this call weren't around then. But since the launch of credit cards, there's been a lot of public pushback from the media warning of reckless spending or debt traps. A number of reputable publications in the 1950s, including The New York Times expressed public concern over plastic money leading to financial irresponsibility. Sound familiar? Nonetheless, by 1970, about 50% of U.S. households had at least 1 credit card. I think that we can all agree that credit cards and their usage, despite some of their issues, are an important part of our economy. We think BNPL will evolve into a similar story, including the pushback from the media along the way. Sezzle has certainly tapped into a need that is not being met by other traditional forms of payment. We welcome the scrutiny as we believe it will only bring to light how our products are helping consumers and how they are the responsible way to pay. Our flexibility allows payments to be matched to budgets, which is critically important for a large segment of consumers. As a reminder, customers must be current with us or they aren't allowed to continue to use this as a payment method. This is one of the key areas where we differ from credit cards. We think we have stronger alignment with responsible spending than a credit card does. We actively think about reducing limits for our consumers, where warranted, to stop overspending. I think some credit card companies welcome a bit of overspending as that overspending can create a revolving account. Instead, we're active in stopping overspending, which creates incredible alignment with responsible behavior. Well, I know most of you are here to hear about our results, so let's get to it. We're pleased to be sharing our second quarter results with you all this evening as they clearly reflect the positive momentum in our business and our industry. Our Q2 results reflect strong momentum and also signal an increase in investment for the future. We continue to push forward as a profitable growth company, which is a concept that we fully embrace. Slide 3 gives a high-level snapshot of Q2, which shows our outperformance versus the industry. With the top line growth of 76% year-over-year, gross margins of 61% and a net income margin of 28%, we remain well ahead of the Rule of 40 and our own version, the Rule of 100, where we scored a 165 this quarter. We are also still on pace with our guidance, which has adjusted net income rising 85% year-over-year in 2025. As the same goes, talk is cheap, and we plan to keep letting our results do the talking. I referenced earlier our investment in the future and would like to expand on that thought on Slide 4. We are hyper-focused on reaching customers efficiently through our marketing efforts. Our marketing spend has been stepping up with a focus on customer acquisition and retention. For Q2, we spent $8.8 million on marketing compared to only $1 million in the prior year. We don't take this lightly as we value every dollar, but we also believe that this is the right time for this future investment as our profitability and positive free cash flow have positioned us well to both grow and reinvest. We are still in the early stages, but we expect to see returns before the end of the year as we target a 6-month payback period on our CAC. I believe our active consumer and mods results reflect the positive trends we are seeing, and I believe there is more to come. In prior years, our spending was more focused on merchant co-marketing. But over the last several quarters, we have shifted our marketing spend to more efficient channels. That improved efficiency will pay dividends in our future results. A key part of our strategy is to never stop innovating, especially as an industry underdog. A major part of our success has been our never-ending push to grow and expand our product offerings to consumers. On Slide 4, you can see that we have launched numerous product enhancements in the last few quarters, some more successful than others, but regardless, we will not rest. Slide 5 is a snippet of the positive results we are seeing from our efforts. I'm extremely proud of our NPS score of 75, which is an incredibly high score for our company offering financial solutions and actually any company for that matter. These NPS results are important because it means our customers love using our products and services. You can clearly see that love is translating into greater engagement in our app. As discussed in the prior slide, we have launched a variety of products and features with the goal of finding more ways to engage the consumer and the results reflect such traction. Monthly active users rose 52% year-over-year. And even more exciting, the engagement from revenue-generating users increased 138%. I believe we are in the early days of monetizing app users beyond just payments. The amounts are nominal at this point, but we believe it represents a large opportunity. On Slide 6, you can see that our marketing efforts for mods are paying off. Mods rose 14% sequentially and 62% year-over-year. We are continuously fine-tuning our marketing spending to maximize ROI. Currently, we are hyper-focused on mods. These mod users have strong lifetime value due to the repeat and recurring nature of their interactions with Sezzle, with subscription services at the forefront of that recurring engagement. As you might guess, there are differences in profitability between On-Demand, Premium, and Anywhere. All three have favorable economics, but lifetime values do vary. The highest lifetime values are from Anywhere because the product is just so easy to use and use again. I know many of you think of us as an online payment method, but take note, 37% of Anywhere orders are in store. This speaks to the value of the Anywhere product, giving consumers access to purchase whenever and wherever they want, well, wherever Visa is and last I checked, they're pretty much everywhere. Let's take a deeper dive on some key engagement metrics on Slide 7. We continue to experience better year-over-year engagement as our connection with the consumer continues to grow. Our yearly active consumer growth is almost at double digits for the first time in quite a while. I believe the improved growth stems from the success coming out of our marketing efforts and our product enhancements. As I mentioned earlier, we are filling a need that is not being met by traditional payment methods. Nowhere is this more evident than our unique merchants number. Our consumers shopped at 412,000 different merchants during the quarter. That is not an insignificant number. It is so rewarding to see that we are providing access to places that to many were unavailable before. Further, our purchase frequency continues to show year-over-year growth, suggesting we are gaining top of wallet status, and we believe this is still in the early innings. On Slide 8, our purchase frequency was flat sequentially. We attribute that to the launch of On-Demand, as it has shown a significant amount of growth in a very short time. Longer term, the short-term investment with On-Demand users will lead to greater profitability. Our On-Demand users are profitable, but just not as profitable as our Premium or Anywhere subscribers. But over time, we believe that On-Demand users will migrate further into our product suite and become future Anywhere enthusiasts. Also on Slide 8, again, it's great to see the pickup in Active Consumers. We can say now that we have 2.9 million yearly active users, and it does seem that we're on the move up with this metric as we continue to add features and services that enhance engagement. If you can't tell, I'm extremely excited about our momentum as we start to see the fruits of our investments in marketing and innovation. 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. Karen?

Karen M. Hartje, CFO

Thanks, Charlie, and good evening, everyone. As Charlie mentioned earlier, you'll see through our numbers that our initiatives continue to drive remarkable top-line growth, easily clearing our internal Rule of 100. Turning to Slide 9. Second-quarter total revenue grew 76.4% year-over-year to $98.7 million and adjusted net income nearly doubled, growing 91.8% year-over-year to $24.4 million. GAAP net income decreased slightly to $27.6 million, resulting from the recognition of an outsized $17.2 million discrete tax benefit in the second quarter of 2024 compared to a $3.2 million discrete tax benefit in 2025. As a reminder, the prior year's discrete tax benefit was attributable to the release of our deferred tax valuation allowance due to the company's profitable trajectory. Our margins also continued to expand with adjusted EBITDA margin and total revenue less transaction-related costs as a percentage of total revenue improving by 5.5 and 3.5 points, respectively, year-over-year. Lastly, despite our rapidly growing revenue and healthy margins, we still maintain strict cost discipline. Nontransaction-related operating expenses as a percentage of total revenue decreased by 4.8 points year-over-year to 28.1%. Let's move on to Slide 10, which breaks out our GMV and total revenue progression. GMV grew 74.2% year-over-year, driven by new product adoption and higher consumer engagement. Total revenue as a percentage of GMV, our take rate improved slightly year-over-year to 10.6%. The sequential decrease aligns with historical trends as our first-quarter take rate benefits from two main items: the spillover of payments from fourth-quarter transactions in the first quarter and the decline in purchase frequency from subscribers compared to the holiday season in the fourth quarter. On Slides 11 and 12, we detail our transaction-related costs, which include transaction expense, provision for credit losses, and net interest expense. These costs totaled $38.4 million or 4.1% of GMV, down 40 basis points year-over-year. This improvement stems from continued optimization and payment processing and increased consumer use of ACH, driving our second-quarter transaction expense down to 1.5% of GMV. This gain was partially offset by an increase in provision for credit losses to 2.2% of GMV as we continue leaning into growth while meeting our stated target of 2.5% to 3% annual provision and unit economics of 60% to 65% as witnessed on Slide 13. Second-quarter total revenue plus transaction-related costs as a percentage of total revenue increased 87.2% year-over-year to $60.3 million and represented 61.1% of total revenue. Since we've touched on our unit economics, we want to showcase the health of our growth in underwriting on Slide 14. Recall on our second-quarter 2024 earnings call, we noted that we started expanding our risk tolerance by letting in more first-time users in mid-2024. We commented that we are expanding our risk tolerance but expected to maintain strong, stable margins, and we did just that. As you can see, we gave more consumers the opportunity to use Sezzle for the first time while also expanding our wallet share with existing consumers. Although we don't show consumer balances, the graph on the right clearly shows that we continue to successfully bifurcate our growth by expanding credit for nondelinquent consumers compared to delinquent users. As a side note, our understanding is that the lines are flipped for the credit card industry. This slide speaks volumes about our underwriting capabilities and reinforces our confidence in the health and sustainability of our growth trajectory. Turning to Slide 15, you'll see that nontransaction-related operating expenses continue to remain well controlled. These expenses, which include personnel, technology, marketing, and G&A, totaled $27.7 million, up 50.4% year-over-year but down 480 basis points as a percentage of revenue to 28.1%. The sequential rise in our nontransaction-related OpEx as a percentage of our total revenue stems from increased marketing spend, which grew by 64% quarter-over-quarter to $8.8 million. As Charlie noted earlier, we're ramping up our marketing efforts with a target payback period of 6 months. Early indicators suggest we're on track to hit this target, and we expect to see the benefit when our first half investment comes to fruition in our third and fourth quarter results. Moving on to the last and arguably most vital component of our income statement metrics, our profitability, as seen on Slides 16 and 17. Net income came in at $27.6 million or 28% of revenue, down modestly year-over-year due to the outsized discrete tax benefit in the prior year quarter. Excluding discrete tax benefits, we achieved adjusted net income of $24.4 million, nearly doubling the prior comparable period in 2024. Adjusted EBITDA also increased at a similar pace, rising 106% to $37.9 million, representing 38.4% of total revenue. Looking at the balance sheet on Slide 18. Our cash remained flat quarter-over-quarter, largely driven by the increase in those receivables from volume growth and the repurchase of $23.5 million of common stock as part of our $50 million repurchase program announced on March 10 of this year. We ended the quarter with $120 million in cash, including $31 million of restricted cash and availability on the line of credit of $4 million on our $150 million credit facility. Cash usage from operations for the quarter was $36.3 million, which again includes a $58.9 million increase in notes receivable tied to our GMV growth this quarter. The sequential decrease in operating cash flow is consistent with our expectations and historical cash flow seasonality. Finally, let's turn to Slide 19, our outlook. We are reaffirming our full-year guidance across all key financial metrics of total revenue growth, total revenue less transaction-related costs as a percentage of total revenue, adjusted net income, and adjusted EPS. I'd like to call out that with $4.1 million of discrete tax benefits recognized year-to-date, our GAAP net income will differ from our adjusted net income guidance of $120 million. And for the first time, we are introducing a 2025 adjusted EBITDA target of $170 million to $175 million. We remain committed to balanced growth, investing where we see efficient returns while holding the line on overhead and credit quality. We continue to monitor consumer trends and macro signals closely. But thus far, our core metrics show sustained growth and strength in engagement, frequency, and retention. With that, I'll turn it over to the operator for Q&A.

Operator, Operator

The first question we have will come from Mike Grondahl of Northland.

Michael John Grondahl, Analyst

Two questions. One, the 748,000 mods, could you talk a little bit about the mix of those between On-Demand, Premium, and Anywhere, how those have trended and then kind of the profitability? And second, on the investment side in Q2, is that primarily marketing that you're calling out the $8.8 million? Is there any other investment to kind of call out or make us aware of? That would be great.

Charles G. Youakim, CEO and Executive Chairman

On the second question, Mike, it's primarily the marketing investment totaling $8.8 million. Regarding the mods, we saw significant growth mainly in On-Demand, which has become a popular new product and is performing as we anticipated. It's easier for consumers to access, allowing more people to engage with our business and pay us directly. However, we've noticed that subscriber numbers have remained relatively stable during this period. As we mentioned a couple of quarters ago when we launched On-Demand, we anticipated some fluctuations in subscriber numbers since On-Demand competes with our subscription products. Overall, we are pleased with our progress, and the growth has largely been driven by On-Demand.

Michael John Grondahl, Analyst

Got it. And how different is the profitability between an On-Demand customer and Premium or Anywhere?

Charles G. Youakim, CEO and Executive Chairman

It appears to be significantly different. Anywhere is the most profitable due to high usage. Once customers decide to subscribe to that product, they fully engage with it. Our NPS scores indicate that they really appreciate our product and tend to use it extensively. Increased activity within the product leads to higher profitability. Premium has better margins compared to the others, so while its usage might be lower than Anywhere in terms of monthly activity, it performs well due to those strong margins. On-Demand, on the other hand, currently has the lowest margins and lifetime value since many customers use it just once to try it out. Therefore, it ranks third among the three. Internally, we are beginning to focus on converting On-Demand customers into subscription customers. The strategy has always been to let customers test our service before suggesting that a subscription might be a better long-term option for them. Once customers transition to a subscription, they tend to fully commit, moving away from merely testing Sezzle or competitor products. This outcome aligns with our expectations from the launch, and we see the rankings as we anticipated.

Michael John Grondahl, Analyst

And maybe just one more there. Did Premium or Anywhere grow year-over-year? Or would you say most of that year-over-year growth was On-Demand?

Charles G. Youakim, CEO and Executive Chairman

Most of it was On-Demand, but Anywhere grew as well. Premium is probably taking the biggest hit of the three products with On-Demand coming into the mix.

Operator, Operator

And next, we have Rayna Kumar of Oppenheimer.

Unidentified Analyst, Analyst

This is Rayna. I have a quick question. Considering the unstable macro environment, if consumer credit quality begins to decline, could you provide some insights into how your underwriting and expense management might change?

Charles G. Youakim, CEO and Executive Chairman

Yes, if we ever see anything, we monitor default rates daily through our systems. And one of the nice things about the product, we talked about comparisons to credit cards, compare and contrast credit cards on the call here. Credit cards from my understanding, if you want to lower someone's credit limit, you got to give a 45-day advanced warning and then after that notification, you have to wait that time period and then you can make adjustments. And one, I'd say, from our standpoint with buy now, pay later, we don't have that sort of restriction. We can actually move limits today. Like if we saw something today we didn't like, and we thought it was maybe economically related, we could reduce limits across the board, which is basically something we do in the holiday period, honestly. Like when we look at the holiday period, we don't want people overspending. So that's why we just feel so good about this product as I am an investor in the company, a lot of the people on the call here. We're all investors in the company as well. And that's what I think helps us sleep well at night as we know that if something comes up, we can always adjust things down. Of course, that will affect your payment volumes and maybe some of the top line, but then you can control loss rates much better than a lot of other financial services products. So in a shaky economy, I think that we're probably one of the best credit products you could ever be a part of on an investor side because of the flexibility and how fast we can move.

Unidentified Analyst, Analyst

Okay. Yes, that makes a lot of sense. What are you guys seeing out there in terms of the competitive landscape? Any changes specifically in pricing from your competitors?

Charles G. Youakim, CEO and Executive Chairman

No, not really. People often inquire about the competitive landscape, and the two competitors that stand out to us are Klarna and Zip, followed by Afterpay and then Affirm and PayPal. I want to clarify that I'm not commenting on the overall quality of those companies; rather, I am focused on who offers products and services that closely resemble ours from a customer perspective. When we assess this competitive landscape, we recognize that all these companies are quite strong. However, we haven't observed significant changes in their pricing or offerings.

Unidentified Analyst, Analyst

Okay. Yes. No, that makes sense. And then just one last quick one. Can you update us on your lawsuit with Shopify? And what are any potential implications in the timing of that?

Charles G. Youakim, CEO and Executive Chairman

Yes, there's no update at this point. I think there are any major updates. We'll let our investors know. But we're not expecting this to be super speedy in terms of the processes, just lawsuits in general are just not the fastest moving entities out there. It could be something that could take maybe upwards of 3 to 5 years in time frame. That's probably the max. But at this point, no real update.

Operator, Operator

And next, we have Hal Goetsch of B. Riley.

Harold Lee Goetsch, Analyst

My question is regarding the significant growth in all your metrics, such as Active Consumers and active unique merchants. It's really impressive. However, I noticed that your overall take rate seems a bit volatile. While it has remained fairly steady, Q1 showed an unusually strong number. I would like to understand your thoughts on this and how we should view it in terms of seasonality or on a quarter-by-quarter basis.

Charles G. Youakim, CEO and Executive Chairman

Yes, great question, Hal. I believe Q1 was likely an outlier because our take rate on volume exceeded 13%. This was largely impacted by seasonality. In the fourth quarter, we typically see larger GMVs, but due to how we recognize revenue, particularly with late fees, payments from Q4 transition into Q1, which usually sees a lower GMV because of seasonality. This revenue appears in Q1, which can complicate things for investors since GAAP emphasizes revenue matching. We account for losses in Q4 but don't do the same for revenue; it carries into Q1 as incurred. If you compare the fourth and third quarters, the fourth quarter is worth examining. We maintain comparable top-line figures. Additionally, we've encouraged customers to repay us via ACH, which reduces both our top line and processing costs. This is why our non-GAAP gross margin is over 60%. Compared to last year, our gross margin has improved even if the top line appears lower in Q1, primarily because our transaction processing costs have significantly decreased.

Harold Lee Goetsch, Analyst

Okay. So essentially, the gross merchandise volume from the fourth quarter, particularly in December, will result in payments being received in January. The on-demand fee contributes to revenues, which is very helpful for understanding the situation.

Charles G. Youakim, CEO and Executive Chairman

The first quarter is the more challenging quarter, and it shouldn't be annualized due to the way revenue is recognized.

Harold Lee Goetsch, Analyst

So with a lot of subscribers, it could very well be a 13 number next quarter, Q1 as well. It's just you need to be ready for a step down in that when that back half weighted December shopping doesn't happen in the second quarter, third quarter.

Charles G. Youakim, CEO and Executive Chairman

Yes. So basically, if we get lots of utilization on subscribers, then the top line comes down a bit. And then when you have lower utilization, like the lower GMVs per user, but the fees come in, then the top line comes up because the revenue recognition is on the lower volumes in the first quarter.

Operator, Operator

At this time, there appear to be no further questions. We will conclude today's question-and-answer session. I would now like to hand the conference back over to management for any closing remarks.

Charles G. Youakim, CEO and Executive Chairman

Thank you. Once again, a big thank you to our team. We continue to scale the business wonderfully. Part of that reason for that is our business does just scale well. But the other reason we're scaling so well is because the Sezzle team is loaded with talent and stars, which means we don't need to keep on adding people as our people do more than most. And I always say this one, they call it a company for a reason, and our company just happens to be damn good. And finally, a fun story for Warren Buffett to close the call. Warren Buffett once gave a talk to a group of MBA students and said something surprising. He held up an imaginary punch card and told them, 'I could improve your ultimate financial welfare and your emotional well-being by giving you a punch card with only 20 punches in it. That's all the investments you get to make in your entire life. Once you use those 20, you're done.' The room got quiet and Buffett continued. 'Under those rules, you really think carefully about what you did. You do your research, you'd wait patiently and you'd bet big when you had real conviction. And because of that, you end up doing far better than the average investor.' Here, Buffett wasn't only talking about stocks, he was talking about life decisions: what jobs you take, who you work with, who you marry, which partnerships you form, which businesses you start. You only get so many shots at things that truly matter. Buffett continued, 'Most people go through life making decisions with no real costs. They over-diversify. They chase every opportunity. They constantly shift focus. But if you had a punch card every time, you'd concentrate your time and energy on what really matters.' Personally, I strongly agree with Buffett on this one, and I hope that we can continue to attract high conviction investors that agree with this mindset. Thank you all for listening in today. We hope you have a great rest of your week.

Operator, Operator

Thank you, sir, and to the rest of the management team for your time also. The conference call is now concluded. At this time, you may disconnect your lines. Thank you, again, everyone. Take care, and have a great day.