PROG - Earnings Call - Q4 2020

Transcript

Speaker 0

Good morning. My name is Andrea, and I will be your conference coordinator. At this time, I would like to welcome everyone to the Prague Holdings, Inc. Fourth Quarter twenty twenty Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Mr. John Baugh, Vice President of Investor Relations for Prague Holdings. You may begin your conference.

Speaker 1

Thank you, and good morning, everyone. Welcome to the Prague Holdings fourth quarter twenty twenty earnings call, our first as a stand alone company. Joining me this morning are Steve Michaels, Prague's 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. For those of you that have not, it is available on the Investor Relations website at investor.pragleasing.com.

During this call, certain statements we make will be forward looking. 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 10 ks filing, which will be filed later today. 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 provide these measures to investors to help facilitate comparisons of operating results with prior year 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.

Speaker 2

Thanks, John, and good morning, everyone. We're excited to report our results for the first time as a standalone FinTech company. I want to start by thanking our employees for their hard work and dedication in support of our customers and point of sale retailers during this pandemic, while simultaneously executing the spin off of our Aaron's business unit. With the spin in the rearview mirror and as we approach one year into this pandemic, we feel we're in a stronger position to execute on our plans and to return closer to our historical growth rates. In the fourth quarter, we grew revenues by 6.5%, adjusted EBITDA by 35.9% and non GAAP EPS by 47.4%.

Our fourth quarter performance was in line with the outlook we provided during the spin roadshow presentation. For the year 2020, we reported revenue growth of 14.9% to $2,485,000,000 and adjusted EBITDA of 320,900,000 an increase of 34.5%. This adjusted EBITDA is burdened by $22,000,000 of spin related unallocated corporate overhead expense. Our adjusted EBITDA would have been $343,000,000 adjusting for this unallocated expense as seen in the non GAAP reconciliation of the earnings release. Our original 2020 adjusted EBITDA outlook provided in February was $3.00 5,000,000 to $323,000,000 Even in the face of pandemic related pressures, we were able to exceed this outlook, driven primarily by strong portfolio performance throughout the year, as well as discipline around discretionary spend.

Our gross merchandise volume for the Progressive segment or GMV, which we will be using going forward to define what we used to call invoice, was down slightly in Q4 year over year. There were a number of headwinds to GMV in the quarter. First, we saw lower demand for consumer finance payment options, including lease to own, as more consumers use cash for purchases, leading to a disappointing holiday shopping season for us. Next, we saw an even greater shift away from in store sales to online where we are currently under penetrated. Finally, we saw continuing supply chain challenges that impacted inventory availability and promotional activity at certain POS partners.

While GMV results were below our expectations, we are confident the numerous initiatives we have in place will result in stronger GMV as we move through this year. In fact, we are up mid single digits year to date, even though January and February 2020 were our two best months of GMV growth last year. We know that 2021 is an important year for our company and we are highly focused and energized now that we have the spin behind us. In our opinion, the total addressable market remains multiples of the current market and we plan to maintain our leadership position. We have tremendous resources at our disposal that start with a great team and the largest network of retailers, many of whom are in the early innings of growth with us.

We also have one of the largest customer databases in the industry and what we believe are the best technology, product and decision science teams in the business. Combining these strengths with an unlevered balance sheet, a profitable business and a cash generating model positions our company for solid growth well into the future. Strategically, our priorities remain largely unchanged. First, we aim to grow our business with our existing and new POS partners. Second, we will continue to simplify and improve the customer experience through technology enhancements that allow our customers to shop how, when and where they want.

Third, we will drive repeat business by leveraging our database of millions of customers. Fourth, we will expand our product and solutions ecosystem via research and development efforts and strategic acquisitions. Finally, we will expand our direct consumer marketing efforts to attract new customers and drive more GMV to our POS partners. First and foremost, we plan to continue to expand our existing POS retail business and add new POS partners using our digital platforms to drive performance. In 2021, we will grow material in e commerce primarily through the significant progress we have made and will continue to make to be fully transactional with our larger retail partners e commerce platforms.

We will also have plugins for those retailers that work with POS providers like Shopify, Magento or Demandware. We will work diligently to onboard e commerce players as we believe that modifications to our product and processes will make the shopping experience simpler and faster for both our retail partners and consumers. While on the subject of e commerce, in 2020 approximately half of our applications came from retailers' e commerce sites or Progressive's digital platforms. Our decision science team has proven their ability to apply fraud detection filters and make profitable approval and approval amount decisions in a customer not present scenario. We narrowly define e commerce GMV as completion of the lease in the retailers cart checkout.

In 2020, a mid single digit percentage of our GMV was generated from e com cart checkout process. In 2021, we expect to more than double our e commerce business and believe it will represent a low to mid teens percentage of our total GMV. We are in the early innings of leveraging our consumer database, which we believe can result in incremental GMV as well as the possibility of offering other products through our research and development efforts or strategic acquisitions. Finally, while not a strategy, our decisioning team's goal is to maximize approval rates while maintaining stable and consistent portfolio performance measured in write offs to a tight range of 6% to 8% of revenues annually. Coming in at 5.4% in 2020, while helpful to our margin performance, reported write offs were lower than historical levels.

The last nine months write offs were only 4.2%, well below our targeted range. Given the additional stimulus money that was recently dispersed and the likelihood of even more government payments in the coming weeks, we think we can improve more people this year and still maintain our risk exposure within, if not perhaps even below our historical ranges. As we discussed during 2020, we took action to more conservatively decision when the pandemic first hit and the potential impact on our customer were largely unknown. During the second half of the year, as the performance data came in, we used that feedback to make a series of adjustments to our decision. As we sit here today, our approval rates are in line with where they were a year ago, and that is even considering the impact of the continued shift to digital application channels, which inherently have lower approval rates.

We closely monitor the performance of our leases and we'll adjust accordingly should conditions change. Shifting to capital and capital allocation, our balance sheet remains in great shape. We ended the year with minimal net debt and have ample liquidity to fund any growth initiatives we may pursue. As you will have seen from our earnings release, our capital priorities remain unchanged. We will first and foremost invest in the business as we pursue multiple growth initiatives in addition to our normal funding of GMV and our modest capital expenditure needs.

Secondly, we will consider M and A opportunities that can broaden our product offerings or enhance our technical capabilities. And finally, we expect to return excess cash to shareholders, which at this point we plan to execute through share buybacks over dividends. Accordingly, our Board of Directors has authorized a new share repurchase program of $300,000,000 and we do not expect to pay a dividend for the foreseeable future. As you will see disclosed in the 10 ks we expect to file later today, Blake Wakefield, Progressive's President has resigned and will be leaving Progressive effective 03/31/2021. Blake has been with Progressive for over eight years and has been instrumental in building the sales organization during his tenure.

Blake is leaving to pursue other interests and on behalf of all of Prague Nation, we want to thank him for his contributions and wish him much success in his future adventures. I'm thrilled to announce that Mike Giordano has recently joined Progressive as our Chief Commercial Officer. Mike comes to us with vast and deep experience building and leading teams and driving outstanding results in B2B sales organizations and was most recently with Samsung for the last fourteen years. Mike will be leading our all star sales team and will be reporting directly to me. While the new round of stimulus payments and pandemic related strains in our economy create an uncertain forecasting backdrop, we are confident that our GMV will grow meaningfully in 2021.

We have a market leading position and have the capital, the technology and the team to continue Progressive's impressive history of growth and innovation. With those comments, I'll turn it over to Brian Garner, our Chief Financial Officer.

Speaker 3

Brian? Thanks, Steve. And let

Speaker 1

me add my welcome to all

Speaker 3

of those on the call and a heartfelt thanks to our dedicated Progressive and Vibe employees for making 2020 a success in the face of unprecedented challenges. I am honored to be part of the team and look forward to helping drive the Progressive story forward. Starting with our Progressive Leasing segment, net revenues for the Progressive Leasing segment in the fourth quarter reached a new record for the period of $594,000,000 an increase of $34,000,000 or 6.2% compared to the 2019. This revenue increase reflects the net of a series of both headwinds and tailwinds experienced during the period. I'll begin with the tailwinds.

Throughout the quarter and as a continuation of recent trends, our customers demonstrated strong financial resilience in the face of economic challenges as evidenced by improved levels of payment performance and associated lower levels of delinquencies in both early and late stages year on year. Next, revenues reflect the continued strong ramp of two large POS partners launched in 2019 as well as increases in e commerce volume year on year. As we mentioned on previous calls, the optimization of new national retailers has historically been a multiyear process as messaging, training and marketing are tailored for our point of sale partners. We are very encouraged by the trends we are seeing there, particularly given the disruption of COVID. Finally, on revenue tailwinds, lease buyout activity continues to be elevated, including significant increases in ninety day buyout activity in the quarter compared to the same period last year.

These buyout trends, along with lower delinquencies, continue to demonstrate changes in customer behavior and increased liquidity of our customers during this time. Shifting to revenue headwinds. Revenue in the period was pressured by recent softness in GMV driven by pandemic related challenges. This recent GMV pressure and high rates of buyout in recent periods has resulted in smaller overall portfolio size as of Q4. As seen in the earnings release, gross assets on lease as of 12/31/2020 declined 5.6% from the year ago period, reflecting a smaller base from which revenue is being generated.

Given the short duration of the portfolio of six to seven months on average, we expect the size of Progressive Leasing's portfolio to rebound fairly quickly as GMV returns to a growth trajectory. Directionally, as we have stated previously, the current period revenue is largely a function of the trailing two to three quarters of GMV and the corresponding impact on portfolio size. Gross margins for the Progressive Leases segment increased in the period to 32.5% compared to 32.3% in the 2019, driven primarily by strong payment performance in the period offset by higher rates of ninety day buyouts. We are seeing these higher ninety day buyouts across most verticals and partner sizes. SG and A expenses for the Progressive Leasing segment were 11.8 of revenues in the quarter compared to 12.7% in the prior year period, an improvement of 90 basis points.

As we indicated on prior calls, the company has limited discretionary spend during this uncertain time while continuing to invest in critical initiatives, particularly our technology platform. Based upon the gross initiatives that are in motion and will continue into 2021, we expect SG and A will increase from 2020 levels as a percentage of revenue closer to the normalized levels we saw in 2019, which was 12.3% of revenue. Write offs has historically ranged between 6% to 8% on an annual basis or 4.5% in the quarter due to lower delinquencies and strong portfolio performance. Over time, we expect macroeconomic conditions to normalize and write offs to return to historical ranges, although we enter 2021 with continuing strong portfolio performance. The Progressive Leasing segment adjusted EBITDA for the quarter was a fourth quarter record of $96,700,000 a 25.4% increase year over year and a 16.3% margin.

The margin performance was primarily driven by improved portfolio performance and SG and A leverage of 90 basis points. I will now pivot to consolidated results. Consolidated adjusted EBITDA including our Vibe segment and unallocated corporate expenses was $90,000,000 for the 2020 compared to $66,200,000 for the same period last year, an increase of $23,800,000 or 35.9%. Adjusted EBITDA was 14.9% of revenue in the 2020, three twenty two basis points higher from the 11.6 in the fourth quarter of the prior year. Diluted EPS on a non GAAP basis for the quarter increased 47.4% to $0.95 versus $0.65 in the prior year quarter.

Now turning to our balance sheet and liquidity profile. During Q4, the company entered into a credit agreement with our bank group that provides a $350,000,000 unsecured revolving credit facility. We believe this facility, along with the cash efficient nature of our business model provides ample liquidity as we pursue our growth initiatives. On 12/31/2020, we had $36,600,000 in cash and a $50,000,000 balance on the revolver. Shifting gears to consolidated outlook.

As we stated in our earnings release, because of the significant uncertainty that continues to exist relating to the pandemic, stimulus, customer behavior and overall economic climate, we are not providing a full year outlook for 2021 at this time. However, as we are here at the February, we do want to share our current view with respect to our outlook for 2021. As we stated, the pandemic related GMV pressures experienced during 2020 resulted in a smaller year end portfolio size versus the previous year. The portfolio drives the majority of the revenue reported in the subsequent quarter. As such, for Q1, we are expecting revenue in the range of $650,000,000 to $670,000,000 or slightly down to flat on a year over year basis.

Consolidated adjusted EBITDA is expected to be in the range of 85,000,000 to $90,000,000 for the first quarter. Of note, beginning in 2021, we will be adding back stock based compensation to adjusted EBITDA. Included in this Q1 outlook is 3,000,000 to $5,000,000 of expected stock based compensation. For reference, stock based comp was $2,800,000 and $14,400,000 for the Q1 twenty twenty and full year 2020 periods, respectively, excluding stock comp expense that was included in unallocated corporate expenses during the year. Non GAAP diluted earnings per share are expected to be between $0.89 and $0.95 Before I open up the call for questions, I'd like to cover one last point regarding an additional disclosure that we see in our 10 ks that will be filed later today.

Late last month, we received a subpoena from the California Department of Financial Protection and Innovation requesting the production of documents regarding the company's business practices in California. We believe the DFPI's review is part of a larger examination of how our industry operates in the state. We are proud of the way we do business and the positive impact we have on the lives of our customers. There is really not much more we can comment on concerning the DFPI's review as it's still early in the process. So with that, operator, we can now open the call for questions.

Speaker 0

We will now begin the question and answer session. And our first question comes from Ken Hill of Loop Capital. Please go ahead.

Speaker 4

Hey, good morning everyone. Thanks all the comments related to the e commerce outlook there. Those are really helpful. I was curious though from a strategy perspective, I know you talked a little bit about M and A being a part of the strategy going forward. But also, I was wondering if you're considering things like partnerships on that front, particularly as you grow out the e commerce space.

I know some of your peers have partnered up with buy now, later firms to really increase their retail exposure there. So I'm curious from your perspective if partnerships might seem more interesting going forward.

Speaker 2

Yes, Ken, thank you. This is Steve. Good morning. Certainly, I mean everything is open on the table for us. We've got a great network of retail partners already and we look to deliver more GMV for those retail partners, but also additional products.

But the BNPL space as you stated has been white hot and attracting a lot of attention. So there are opportunities for us from a partnership standpoint as well as other waterfall type opportunities from a partnership standpoint. So as we think about our R and D function that we recently stood up as well as the when I think about strategy and M and A, it certainly involves potential partnerships not just outright acquisitions.

Speaker 4

Got it. And if I could have a follow-up, I think you mentioned kind of reengaging some customers you had in the past I think on your platform somewhere in the neighborhood of I want to say 12,000,000 customers in the database there. So wondering if you could talk a little more specifically on how you're reengaging those customers and who maybe haven't used the product more recently and then maybe what some of those initial returns look like there?

Speaker 2

Yeah, we do have a very strong database and in our active customer base, we also have a very engaged customer that engages with our digital platforms very frequently. So we think that we've got an opportunity to speak to that customer through multiple platforms frequently. But specific to your question about the large database of maybe inactive customers that we haven't seen in a while, we've got marketing campaigns that are not only prospecting for new customers, but also reaching out to our previous or inactive customers that have done business with us in the past and representing or offering up or servicing offers to them to come back. And that's one thing the power of our retail partnership network and the power of the brands that we partner with are very compelling to our customers and they want to shop at those retailer environments. So we're seeing some success in getting and shortening the time to repeat for our customers to repeat.

We have a high repeat business in our history and it's actually increasing each year. But a lot of our marketing efforts are actually compressing the time from the time that they finish a lease to the time they start a second lease. And we believe it's helpful in a couple of ways. It helps our customers acquire the products that they want, but it also helps us prove to our retail partners that we're driving incremental business into their environment, which continues to underscore improve our value as a provider for them.

Speaker 4

Got it. That's great detail. Thanks for taking the questions.

Speaker 2

Thank you.

Speaker 0

The next question comes from Kyle Joseph of Jefferies. Please go ahead.

Speaker 5

Hey, good morning guys. Thanks for having me on.

Speaker 2

Good morning, Good morning.

Speaker 5

Good morning. On sorry, not invoice, GMV, apologies.

Speaker 2

Thank you.

Speaker 5

As as as we go through '21, you talked about some of the some of the headwinds there in terms of supply chain challenges and then, again, more brick and mortar exposure. But with with vax I guess you break it apart into into two components. Vaccines and whatnot, at what point do you expect the brick and mortar headwinds to kind of ease? And then give us a sense for supply chain issues and when do you think those trends normalize?

Speaker 2

Yes. Thanks, Scott. I'll start with supply chain. I mean, supply chain has already started to heal. It was most acute last summer and especially in the furniture and appliance verticals.

It still existed at various levels depending on the size of the retailer through the holiday shopping season. And we've heard from some of our partners and other sources that there's record backlogs in furniture retail. And we've actually experienced it in our approval, we would call approved not converted because the customer would be approved, would enter into a deal, but because the lead time was eight or twelve weeks, the customer would end up canceling the deals. And so queue of that has really risen to an all time high. But we don't expect that to be a meaningful headwind as we move through 2021 through the top half and back half of 2021.

We think those things are going to start to heal a little bit more. And then as you talked about, as it relates to the pandemic, we don't have a crystal ball, right? We've got potential stimulus coming. But we all think that whether it be availability of vaccinations or what, some throughout 2021, the economy and our movement around will reopen and the people will return back to stores in bigger way. We And think that will be a tailwind for us.

But also, it's our focus and it's our energy is around being there where the customer wants to shop. That's why you'll hear much focus on our e commerce initiatives because we think they are important. However, we think it's important to have a there's an overused term, but an omni channel solution where customers can because in many customer shopping journeys, they will cross over channels. May start online and go in store and then finish on their mobile phone. And we want to have a seamless integration across those channels for our retail partners.

So we think that in store traffic will rebound and that will be a help to us from a GMV standpoint in 2021, but we also think that our efforts to grow in our ecom capabilities and our ecom presence with our retail partnership network will pay dividends as well. So that remains to be seen as 2021 plays out, but that's our current expectation.

Speaker 5

Got it. Very helpful. And then next, the fourth quarter was active in terms of headlines in the virtual lease to own space. Can you just give us a refresher on the competitive environment, any recent changes you've seen and walk us through how that is on a nationwide retail partner basis versus smaller geographical?

Speaker 2

Yes, certainly, there was a lot of activity in the fourth quarter starting our spin transaction and then December heat up even more. So, looking from a competitive standpoint, it's always been competitive. And some of the actions that were taken by our competitors will create even more formidable competitors, but we're up to that challenge. So I would say that from a competitive standpoint, it hasn't changed a ton. We still have a very competitive SMB space with multiple players and some sizable ones that are growing fast.

In the enterprise world, it's less competitive, but there are several players that can that we expect that we will see as we try to land and convert the pipeline that we have out there. So the moves over the last couple months and the Renaissance one in particular, would call out by name is certainly something to watch, but we feel confident in the what we bring to a potential retailer that's evaluating this solution. We've got the scale and the referenceability and the infrastructure and the know how to provide a omni channel solution for them. And we expect that we will continue to win our fair share.

Speaker 5

Got it. Very helpful. Thanks for answering all my questions. Appreciate it guys.

Speaker 2

Thanks, Kyle.

Speaker 0

Next question comes from Jason Haas of Bank of America. Please go ahead.

Speaker 6

Great. Thanks for taking my question and good morning.

Speaker 7

Good morning.

Speaker 6

I'm curious if you could speak a little bit more towards some of the quarter to date trends you're seeing just because it's I imagine there's been some maybe some volatility due to just stimulus, The weather's maybe had an impact and also with tax refunds being delayed. So I'm just curious how each of those, if they've had an impact at all on your business. Thanks.

Speaker 2

Yes. Thanks, Jason. You're right. Mean, you hit you nailed them. We did see an impact in GMV from stimulus right at the beginning of the year, although it was probably a little bit more muted than what we saw in April ish timeframe of last year.

And then we had some good trends. As we said, we were year to date, we were up mid single digits in GMV. As you think about that, we have that the stimulus impact and then exactly what you said, the tax refunds are 85% delayed or 85% down year over year so far. I think the anticipation is that they'll start hitting this week and probably into the next two weeks of March. So we'll be watching to see that impact.

Although there's also concerns around the fact that overall size of the average refund will be kind of low double digits. So we're watching that. And then we were certainly on a higher year to date trajectory from a GMV until the last kind of ten days of weather related challenges. And certainly, Texas is a big state for us and had some really big disruptions. So we've got all of those things kind of baked into the year to date numbers.

And then we'll be watching the release of the tax refunds throughout the balance of the quarter. And then obviously, as we get into the back March, we start to get into comparing against the onset of the pandemic last year. So a of moving parts to bake into the cake for Q1 GMV.

Speaker 6

Thanks. And then as a follow-up question, could you provide some more color on how the rollouts at I guess now they've been around for some time, but I'm curious if you can provide more color on the rollouts of some of your largest partners just in terms of how employees are getting used to the systems, how management's supporting the programs and just any more color on those on the cadence of those rollouts?

Speaker 2

Yeah. And without mentioning anybody by name, I think everybody knows which ones you're referring to. We're very pleased with the results and the rollout throughout 2020 and year to date 2021 in our major in our recent major launches from 2019. You mentioned it a little bit ago, which is true, but it feels like we're it's just an instant ago. We're in the very early innings of growth with partners and management.

We have great dialogue between our teams. We have lots of sessions on how to continue to grow and what tools need to be provided in order to have further penetration. But even as those tools mature, and as Brian said in his prepared remarks, it is a multi year process. We're very pleased with how with the ramp and the growth in 2020 in both of those national partners and expect big things in 2021.

Speaker 6

Great to hear. Thank you.

Speaker 2

Thank you.

Speaker 0

The next question comes from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

Speaker 8

Hi, good morning and congratulations on your first standalone call here as a company.

Speaker 2

Thank you, Brad.

Speaker 8

You're welcome, Steve. A couple of questions, if I may. First, around the changes in the decisioning. I believe you said your approval rate is running about where it was this time last year. When we think about the back half of this year and lapping those quarters where your losses were at 2.1% and then 4.5%, what's the opportunity to add to revenues in those quarters if you underwrite at a higher level, if you decision at a higher level?

How much could that potentially add to revenues in the back half?

Speaker 2

Yes, Brad, without kind of quantifying the revenue, and I'll let Brian chime in here as well. But from a GMV standpoint, I would say, decisioning definitely had an impact on our GMV in 2020. And we think that the decisions we made in March 2020 were appropriate at the time. They may have proved a little conservative now, but knowing what we knew then, we would probably make the same we would make the same decision. So but having said that, we did make the moves that I outlined in my prepared remarks, and we expect that, that will help GMV in 2021.

I think we said in previous calls that in the let's call it 2020, the 2020, we had our approval rates were about 500 to 700 basis points lower than the previous year. So it wasn't an immaterial number. And so as you think about revenue, which was your question, that's a more difficult question to answer because that is mostly driven by GMV that will be delivered in Q1 and Q2. But as you're thinking about comping GMV in the back half, we think there's a lot of factors that would create some tailwinds and a good comp and decisioning is certainly probably in the top three, not number one, but in the top three.

Speaker 3

Yes, I think that's right. And so Steve mentioned, there's going be a

Speaker 2

bit of a lag from the

Speaker 3

time you make those decisioning changes to receive in revenue the one to two quarters typically. But yes, think as we frame up Q1 and beyond, think the expectation around write offs in general is to see some movement there take it up a bit. We're looking for opportunities to the extent where there's profitable deals to decision on of letting them in the funnel. So we continue to watch that and look to be opportunistic. We've got a best in class decisioning team that is making it their priority.

So as this environment changes with stimulus and looking at changes in customer behavior, we're consistently looking at that and looking for opportunity to grab that GMV to the extent that it's additive to the bottom line.

Speaker 8

That's very helpful. And then, Steve, if you could just remind me the errands in Progressive last year in the first quarter increased reserves as a result of the environment that we were going into and the risk of losses being higher. And I believe, as of the third quarter, you all had not released those reserves. Can you just give us an update on where some of the reserves stand today for current conditions and expectations relative to these strong write off trends?

Speaker 3

Yes, sure. I can take that. You're right. We recorded about $16,000,000 of incremental COVID reserves back in Q1 as this pandemic had begun and we had uncertainty around how the customer has been performed. As we closed out the year, we brought that reserve down slightly to $14,000,000 We feel there's still meaningful uncertainty out there with the muted tax season and ultimately it still remains to be seen on how this customer is going to handle rent deferrals and things like that.

So effectively, we feel like we're adequately reserved. I wouldn't say we're reserved for a catastrophic case, but I think we're conservative with the base case. And I think I don't think there's going to be additions to that reserve based on what we can see right now as we move forward.

Speaker 8

Got you. So to make sure I heard you right, the reserve is now $14,000,000 down from 16,000,000

Speaker 3

Yes. It's brought down a couple million dollars based upon our most recent analysis.

Speaker 8

Perfect. And as a last housekeeping item, are you able to share with us the percentage of revenue that you have coming from California right now?

Speaker 2

Yes, we can share that. For 2020, it was approximately 9%.

Speaker 8

Great. Thank you all so much.

Speaker 2

Thanks, Brad.

Speaker 0

The next question comes from Alex Maroccia of Berenberg. Please go ahead.

Speaker 7

Good morning, guys. Thanks for taking my questions. The first one is on your e comm strategy and it piggybacks off your previous comments around SMBs versus enterprise focused, virtual lease to own companies. So will you in particular be focused on landing a handful of very large retailers similar to your legacy partners from an e com standpoint? Or can we expect you to target a large volume of smaller DTC startups similar to your peers have been targeting?

Speaker 2

I would say yes to both of those. Our strategy we've got we'll have teams focus on both of those different markets. We certainly our biggest near term opportunity is to as we've talked about before, and get fully transactional in the e comm checkout cart of our existing network of enterprise partners. But at the same time, we know that simple and integration less plug ins with the popular platforms like Shopify and Demandware and Magento for in the SMB space are a big opportunity as well. And so we've got teams that are not only focused, but incentivized on both of those very important areas.

Speaker 7

Okay, great. That's helpful. And then on a related note, can you discuss some of the margin impacts of an expanding e com business? Just because I guess most importantly, would think e com write offs could be a bit different and then returns are more expensive since there's not a physical store involved. So is this thinking correct?

Speaker 3

All things being equal, typically how we handle e commerce is you're going see a lower approval rate on e commerce. And so our decisioning team will effectively assess that risk, be a little tighter in terms of their decisioning profile and let that in. All in is we evaluate the margins of profitability of e commerce deals. We're able to achieve effectively very similar margins to what we would see in say our brick and mortar transactions. So you're right, the risk of the customer is generally elevated, but we're able to solve for that through our proprietary decisioning.

Speaker 7

Okay. Thanks. Good luck for the quarter.

Speaker 2

Thank you.

Speaker 0

The next question comes from Bobby Griffin of Raymond James. Please go ahead.

Speaker 9

Good morning, everybody. Thank you for taking my questions. First, Steve, I just wanted to quickly go back to your in your prepared remarks, you mentioned, I think, three headwinds to GMV, cash payments, the e commerce aspect and then the supply chain. Were those given in rank order in your view? Or if not, can you maybe size up or help us think about which one you thought was the biggest headwind during the quarter?

Speaker 2

I think, yes, those were in rank order. I mean, what we did see and we've had anecdotal evidence from our partners is that even though they may have had positive comps in the quarter because ultimately the holiday shopping season was up year over year, they saw a shift of composition of cash sales or personal credit card usage versus people reaching for offered point of sale finance options within their environment. So that was certainly a headwind for us. We also saw and I think I mentioned this on last call, we also saw some supply chain issues manifest themselves through visibility into a truck of furniture coming into the store. But by the time the truck got there, was all pre sold.

So there was less even though they had good comps in that category, there was less availability for inventory availability for people who were using financing because it was sold with people who put deposits down in cash. So I would say back to your original question, was in rank order of how we thought what changed and what we thought the impact was since we basically gave our outlook on October 29.

Speaker 9

Okay. And then on the ecommerce aspect, know, and trying to drive better penetration there with your customers or your partners, obviously, getting the service offered online is the first step. But can you maybe talk about some of the marketing angles or the initiatives? Because I'm just thinking about it from a high level. You know, if I walk in a store, there's a store associate that can tell me about rent to own, educate me about rent to own, but it could be a little bit more difficult for a customer to realize that x y z retailer offers that online when they're shopping online.

So is there any new programs there that you're putting in place or how you're working with your partners on that aspect?

Speaker 2

Yeah. That's a that's a real challenge basically of getting that that awareness and visibility online especially because everything is mobile first and real estate on a mobile phone is the most valuable commodity as it relates to the landing pages and and checkout cards. So but we we've got we we work very well with our partners. We've got great marketing collaboration, and we can reach for particular promotions that can drive people to knowing that the offering exists online and then that raises awareness. But it is a have a button basically says pay with Progressive or something, but it's until that's after they put something in the cart.

So we've got work to do and it's in collaboration with our retail partners on how we raise that awareness and it's in both of our best interest as well as the customers to make sure they know it's available and those plans are happening and also being enhanced all the time.

Speaker 9

Okay. And then I guess lastly for me on tax refund season, I mean clearly a lot of moving parts here. But historically, if I remember correctly, when your customers get refunds, it drives buyouts and they buy out of the contract early, so there's good cash flow into your business. If if refunds are down, you know, dollar wise or just the amount or something, how do you foresee that playing out? I mean, you can see customers, I guess, hold on to the product a little longer, but then at the same time, you don't have your customer base with new cash for new purchases or something.

So just any high level thoughts about how you guys view this potentially playing out would be helpful for us to think about.

Speaker 3

Yeah, I think what I'd say to that, I mean in the order course, what we see during tax season is typically a spike in ninety days with the buyouts. Collections tend to be higher. You get some improvement in your delinquency metrics and GMV tends to also benefit. So in isolation, pushing tax season out and a more muted tax season does impact these metrics. However, if think about stimulus and what's on the horizon there, that obviously throws a big wrench into trying to hold that in isolation.

There's obviously moving parts there. So I think there's I think generally the macro trends point towards a continued strong portfolio and maybe a slight delay in GMV volume as we think about a delayed tax season. But from a cash flow perspective, one of the strengths of this model is the ability to turn the portfolio quickly. So even with that considered and having that tax season pushed out a little bit, the company is able to self fund pretty easily during this point in time in terms of cash flow from operations being positive. So don't think there's any concern there.

I think there's probably a little bit temporary dynamic of pushing back the metrics that I specified. And ultimately, think we'll be in good shape. But there's certainly a lot of liquidity out there right now and the stimulus is going to add to that.

Speaker 9

Okay. I appreciate that. And I guess one one quick model. Can you question. Can you give us the the active doors in four q where we can clean up our model?

Speaker 3

Yeah. I can I can give you the the active doors? Active doors were were 20,700, just down from 2,200 same period last year. 22,000. Yeah.

Sorry. 22,000 from last year. So $20,700 down from $22,000 same period last year. So really that's being driven by we talked about some store closures during the pandemic. Some of our large national retail partners had some permanent closures that are playing through to that number.

And I mean, I'd be remiss if I didn't say that particularly as we shift more towards e commerce and with these big box retailers ramping and become a higher concentration, that metric becomes less and less important. We see more productivity in these big box retailers, which kind of skew these numbers, say, from a regional mom and pop. So I mean, just keep that in mind as you're assessing that, but those are the figures for the quarter.

Speaker 9

Yeah. We should see I mean, as as that moves up, we should see higher invoice I mean, higher excuse me. GMB. It's gonna take me a while to get used to that new the new metric. GMB per asset.

Speaker 2

Thank you for the efforts. Yeah. All right.

Speaker 9

Thank you. I appreciate the time. Thank you.

Speaker 0

The next question comes from Vincent Caintic of Stephens. Please go ahead.

Speaker 10

Hey, good morning. Thank you for taking my questions. I had a kind of a clarifying question about some of the online details you gave. So the online GMV mid single digits and you expect it to more than double to the, like, lower mid teens percentage of GMV. Is that the, percentage of, application or I should say closed, applications online so the application gets funded online?

And then if so, I'm just kind of wondering when you think about the opportunity, what could that percentage be that you do online, you close online?

Speaker 2

Yeah. Thank you, Vincent. So I guess, I think I mentioned this, but we narrowly define e commerce, right? So we have multiples

Speaker 3

of that

Speaker 2

from a percentage standpoint that have an e commerce component to them when it comes to GMV. Like if we think about app starts and things of that nature. But we narrowly define e com as it has to finish in the retailer's car. That means lease signing, first payment, arranged delivery, that type of stuff. So that's what we're referring to when we talk about mid single digits.

And then with that definition, we're talking about being in the low to mid teens in 2021 of overall GMV. And obviously, our GMV is quite large. So that's a really big business. What it could be is, I would say, we're somewhat agnostic to because it's ultimately driven by the customer. The customer will decide where they want to engage with our retail partners.

We do think there's opportunities to through our marketing efforts and for our repeat business to keep them, know, to to have more more customers do business on online and drive customers through into the e com into the e com environments. But ultimately, this we expect that will be channel shift. There'll be some people that go in store that used to go in store and now they'll be online. But we expect it will continue to grow and it will grow faster than the rest of the channel. But we're not targeting a number because it's really all about where the customer wants to participate with us.

Speaker 10

Okay. That's very helpful. Thank you. And I wanted to last question. I wanted to follow-up on the question about competition and in virtual lease to own.

And over the fourth quarter, we had a couple of these guys go public or announce that they're going public, whether it was via the Rent A Center acquisition of Asimo or this Catapult going public. I think, you know, the investor questions I've been getting is, you know, now they're familiar with with other, other competitors out there. And so I just wanted to kind of throw a broad question to you. Maybe why why does a retailer pick Progressive over the other guys and essentially give us a sales pitch on Progressive since and how it differentiates versus some of the other players out there? Thank you.

Speaker 2

Yeah. Thank you. I mean, listen, that's gonna change based on based on what retail you're speaking to. But, from an enterprise account standpoint, Progressive is still the largest, it's the most referenceable. We're the only one currently servicing the largest national retailers that offer this solution in the country.

And that comes with the ability and the history of servicing their customers and their retail sales associates through customer support, merchant support very well. It also comes with the infrastructure and the tech chops and everything that allows them to feel confident that we're going to take care of their customers all the way to their data. So that history is very important. We believe that our referenceability and our track record mean that we'll be in the conversation for all these retailers that are looking for a solution. And our roadmap and our technology roadmap will help to paint the picture as to why Progressive's who to choose.

In the SMB space, it's very competitive and we're not going to go out and just compete on price or rebate, but we have a great track record there of delivering value and taking care of their customers. Our customers love us. We've got great reviews. The voice of the customer speaks very loudly for us and we use that in, as you say, our sales pitch. So we've got a net promoter score of 62, which is outstanding.

And it's basically our customers speaking that they that we treat them well and they like us. So we and then the last thing, and it's very important, and I alluded to it earlier, is we are not just a save the sale solution for a retailer. We are a value added partner that may have started a few years ago as a ride their marketing rails and save the sale. Now we are a incremental driver of business of customers that were not historically doing transacting in these retail environments. And so our network effect and our the digital ecosystem that we can bring to bear and provide for these retailers and prove to them that either our marketing effects or our relationship with the customers have driven them into that retailer is very powerful.

And it not only helps us maintain retailer relationships but attract new ones.

Speaker 10

Okay. That's very, very helpful. Thank you very much.

Speaker 2

Thank you, Vincent.

Speaker 0

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

Speaker 2

Thank you everyone. Thank you for joining us today and thank you for your interest in our company. We are certainly uncertain out there, it's certainly uncertain. But even in this uncertain environment, our team is very excited about our launch as a standalone company and our opportunity to continue Progressive's history of growth and innovation. I want to thank all of our employees for their tireless work to help provide simple and affordable purchase options to the credit challenged consumer.

And we look forward to updating you again next quarter.

Speaker 0

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