Flexshopper - Q1 2023

Transcript

Speaker 0

Welcome to FlexShopper First Quarter Financial Results Conference Call. Please note this conference is being recorded. I will now turn the conference over to Carlos Sanchez, Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, and good morning. Welcome to FlexShopper's Q1 2023 financial results conference call. With me today are Russ Heiser, our Chief Executive Officer and John Davis, our Chief Operating Officer. We issued our earnings release on Thursday of last week and corresponding Investor Relations presentation this morning, and we'll be referencing these during the call today. Both can be found in our Investor Relations section of our website.

We will be available for Q and A following today's prepared remarks. Before we begin, I would like to remind everyone that this call will contain forward looking statements regarding future events and our financial performance, including statements regarding our market opportunity, and the company's most recent periodic SEC reports, including our Annual Report and Quarterly Report 10 Q for the quarter ending March is 31, 2023. These statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements. Except as required by law, we undertake no obligation to publicly session will not update or revise any of these statements, whether as a result of any new information, future events or otherwise. During today's discussion of our financial performance, we will provide certain financial information that contains non GAAP financial measures under SEC rule.

These include measures such as EBITDA, net income and adjusted net income. These non GAAP financial measures should not be considered replacements session should be read together with our GAAP results. Reconciliation to GAAP measurements and certain additional information are also included in today's earnings release, which is available on the Investors section of our website. This call is being recorded and a webcast will be available for replay on our Investor Relations section I will now turn the call over to our CEO, Russ Heiser.

Speaker 2

Thanks, Carlos. Good morning. I appreciate everyone dialing in this morning. Today, I will discuss a few highlights and some new initiatives before handing off to John Davis, our COO, so he can share further insights on the operational metrics. Then we will open the call to questions.

Q1 2023 was off to a good start with net revenue of over $30,000,000 Gross profit of $13,000,000 and EBITDA of over $6,000,000 Our substantial adjustments to our underwriting and risk management have resulted in solid improvements to loss rates. Additionally, we have seen a decline in early payoffs, which also increases the yield on the portfolio. We expect that with no other substantive changes to the macro environment, loss rates session continued to improve over the next two quarters as we cycle through the historical portfolio that was originated at the height of last year's inflationary increases before we had tightened underwriting to our current levels. With what we hope are the most negative consequences for our customers of this inflationary environment behind us, we are now focused on positioning ourselves to take advantage of opportunities. Additional upside should come from stronger credit profiles applying for lease to own as the more traditional providers of consumer credit continue to tighten their own underwriting.

So far, we have yet to see a meaningful improvement in the risk profiles in new applicants. However, by making some adjustments to our pricing model, we hope to be a compelling source of liquidity for these types of customers going forward. On top of the contract extension with our largest partner mentioned on the last call, our enterprise sales team has been progressing with a few large is onboarded through retailers in the second half of this year. Furthermore, as many of our long time investors are aware, Outside of a few select initiatives, we have yet to focus on small and medium businesses. Now the macro environment is showing some stabilization, we We believe this is the time to launch a sales team focused on this segment that will complement our enterprise sales efforts as well as our flexshopper.com marketplace.

On the lending front, the Revolution storefront platform will be onboarding its first new virtual locations with Liberty Tax franchisees this quarter. It took almost 6 months longer than I expected to get to this point, but we now have the necessary infrastructure enhancements and regulatory framework to begin rolling out session. While it will take a while to grow the portfolio size at each new location, the magnitude of potential locations should provide lift as the rollout speed up. Now I'll turn the call over to John to discuss our operations.

Speaker 3

Thanks, Russ. I continue to be cautiously optimistic about the trends of the economy relating to the typical FlexShopper customer. With the rise of inflation observed last year, our typical customer experienced their own personal recession. Their take home pay reduced by increases in core expenses such as food, transportation and housing. With the year over year inflation rate dropping for the rates on their obligations with FlexShopper.

Total funded originations increased 29% year over year. Gross profit dollars increased by approximately $4,200,000 year over year and our gross profit margin improved by approximately 1200 basis points from Q1 last Gross profit from loans increased by a net $3,500,000 and gross profits from leases increased by $800,000 year over year. For our lease channel, our underwriting standards remain significantly tighter year over year with a 24% lower approval rate on submitted lease applications and a 19% year over year reduction in lease origination dollars.

Speaker 4

We

Speaker 3

are beginning to lap underwriting changes made last year in Q2 with a further lapping in Q3. Also, increases that we have observed in approval conversion and higher average order value to start to result in positive year over year lease origination growth as we move through the rest of 2023. Also, continuing rollouts of existing bricks and mortar partnerships should provide significant volume increases from current levels. With the combination of a stabilizing inflationary environment and the results of our underwriting and collection strategies. I'm pleased to see that our lease bad debt percentage has improved with an over 800 basis point improvement from Q4 Absent a relapse and unfavorable economic conditions, I expect our least bad debt percentage $3,000,000 lower year over year this quarter due to lower origination levels from our proactive credit tightening over the past few quarters.

Offsetting this was a $3,800,000 lower depreciation and impairment of lease merchandise expense. Depreciation as a percentage of gross lease billing and fees for Q1 was 44.8% versus 48.4% in Q1 of last year were approximately a 360 basis point improvement. This is in part due to the seasoning of our retail margin expansion efforts. As leases mature with this additional retail margin included, our lease depreciation costs decrease as a percentage of gross billings. The net result of the bad debt moderation and retail margin seasoning was an $800 increase in lease gross profit year over year, even with the significant drop in approval rates year over year.

As we let credit tightening and rollout new storefront doors, improved unit profitability should provide tailwind to overall results. On our lending front, we originated $14,000,000 in Q1 through our Revolution Finance platform. As a reminder, we issue consumer loans with approximately 100 storefronts consisting of owned physical locations and virtual locations within Liberty Tax Stores using state lending licenses. These originations represented over 1 half of our total originations for Q1 and has immediately become an important part of our business. We are happy with the credit quality of the loans we are originating and the team is looking to expand both same store loan volumes through marketing initiatives as well as looking to expand into new virtual locations within the Liberty Tax Network.

As I mentioned earlier, this channel provided approximately $3,500,000 higher gross profit versus Q1 of 2022. We are also operating the business more efficiently versus last year. Salary and benefit expense and operating expenses were $283,000 lower year over year, while growing revenue by 6%. Also lease marketing expense was significantly lower year over year, offset by higher loan origination costs from the introduction of Revolution volume. Excluding depreciation impairment of lease merchandise, The operating expense ratio improved by 160 basis points year over year.

As we grow, we will continue to be mindful of expense discipline and leverage our existing platform to achieve growth as efficiently as possible. As a summary, we continue to develop a diverse revenue stream between our proprietary lease marketplace, our bricks and mortar lease and loan partnerships and our Revolution loan platform, which will provide profitable growth for FlexShopper. I'm excited about the opportunities that we have in front of us. I also want to personally thank our team members and our partners who contribute so much to the results we are achieving.

Speaker 4

With

Speaker 3

that, let me turn the call back over to Russ.

Speaker 2

Thanks, John. Has demonstrated this quarter the team at FlexShopper is well on its way to surpassing previous revenue and EBITDA benchmarks. As John mentioned, the team continues to achieve significant results on an accelerated timeframe. We're pleased with all of what's taking place. With that, we'll take any questions you might have.

Speaker 0

Our first question is from Scott Buck with H. C. Wainwright. Please proceed.

Speaker 4

Good morning, guys. Thanks for taking my questions. Russ, you mentioned you're making some changes in the pricing model To attract some new customers, could you give a little bit more color on what you guys are doing there?

Speaker 2

Sure. I think as we continue to See new customers come in or potentially come in as a result of tightening above us. I think there's probably a spot where they can Fill in that necessarily isn't necessarily a 2.4 markup.

Speaker 4

Okay. That's Sorry, go

Speaker 2

ahead. No, I was just going to, as you know that there's a lot of room potentially where these customers are being denied for additional liquidity and a 2.4 markup. And we just want to Make sure we can bring those customers in and be attractive to them.

Speaker 4

No, that makes sense. And then on marketing, it looks like you were down pretty meaningfully, both A factor of seasonality plus just a little bit of internal tightening.

Speaker 3

Hi, this is John. There's a combination of the 2 really. We are certainly seeing More efficiency in our marketing. Our conversion rates on approved customers are Significantly higher. A lot of effort has been put into to improve that.

There's also certainly a seasonality factor in play. Q1 is usually less There's less demand because of tax returns and customers have more liquidity than certainly during our holiday season. And then I think 3rd, we're always mindful of what we spend on marketing with low approval rates. The marketing cost is a function of the cost to bring an application in and the approval rate. But as we start to lap approval rate changes and actually expect to see higher approval rates going into Q2 To and forward, we actually expect to spend more money because the unit cost required will be improving.

Speaker 4

Session. That's helpful, John. And then last one for me. The early prepayments, are we just talking that up to tax refunds in the quarter

Speaker 2

The decline in prepayments we think is really a function of customers having less available liquidity, the disposable income and thus not paying off as frequently as they paid off in the past. There's also been some changes into how frequently we market the 90 day same as cash on our online platform and that's also resulted in a decrease.

Speaker 4

Got it, Russ. So it was a decline, but I must have missed it. Thank you very much for the time, guys. I appreciate it.

Speaker 0

Session. I would like to turn the conference back over to Russ for closing comments.

Speaker 2

Thanks again for all of you that joined our call this morning. Feel free to reach out with any additional questions you might have and we look forward to catching up with you for the 2Q 2023 presentation.