Sezzle - Q1 2024

Transcript

Operator (participant)

Please note this event is being recorded. I would now like to turn the conference over to Charlie Youakim. Please go ahead.

Charlie Youakim (CEO and Executive Chairman)

Thank you. Good afternoon, everyone, and welcome to Sezzle's 2024 Q1 earnings call. My name is Charlie Youakim. I'm the CEO and Executive Chairman of Sezzle. I'm joined today by my co-founder and president, Paul Paradis, our Chief Financial Officer, Karen Hartje, and our Head of Corp Dev and IR, Lee Brading. In conjunction with this conference call, we filed our earnings announcement with the SEC and have posted it along with our earnings presentation on our investor website on sezzle.com. If you have not done so already, please go to the Investor Relations section of our website. There you'll find the press release and earnings presentation under Quarterly Earnings within the Financials section. Now that we're all sorted, let's get started. We've had a number of extraordinary quarters in our short history, and I think you'll agree that this quarter could be among the best thus far.

Now let's dive into the presentation, starting with the left side of slide 3. Q1 turned out to be another strong quarter of top-line growth as total income increased 35.5% compared to the prior year's quarter. Net income for the quarter came in at $8 million, which is larger than the $7.1 million in net income that we posted for all of 2023. Because that result puts us at nearly 50% of our guidance for the year, you might guess that we're raising 2024 guidance, and you're correct. I'll get to that in a moment. The $8 million in net income represented a 17% net income margin and resulted in a 31% return on equity for the quarter. To emphasize, the return on equity is for the quarter. It is not annualized.

Our total subscriber count increased to 371,000 at the end of the quarter, which represents a net increase of 64,000 subscribers during the quarter. Further, we recorded $15 million in adjusted EBITDA compared to $8.3 million in the prior year, at a margin of 31.9% for Q1. Consumer engagement remains high, as evidenced by the top 10% of consumers transacting an average of 53 times per year. As alluded to earlier, we are raising our net income guidance for the first time and for the first time providing EPS guidance. We are increasing our GAAP net income guidance for 2024 to $30 million from $20 million and providing GAAP EPS guidance of $5 for 2024. On previous calls, we have discussed the Rule of 40 and how companies may differently define profit margin in a range from adjusted EBITDA margin to net income margin.

We're happy to say that we exceeded the Rule of 40, however you'd like to slice it. If you take the hardest measure of the Rule of 40 and use revenue growth and net income growth, net income margin, we're north of 50% for the quarter. If you take revenue and EBITDA margin, we're north of 67%. We also discussed our own goal of 20/60/20, which equates to beating a 20% revenue growth target, a 60% gross margin goal, and a 20% net income margin goal. In the Q1, we're getting closer to attaining that overall 20/60/20 goal with a 35.5% revenue growth, a 55% gross margin, and a 17% net income margin. Because of our recent run of successes, we often get the questions from bankers, analysts, and investors, "How have you all done such an amazing turnaround?

What's the secret sauce?" Our success did not happen overnight, nor was it easy, but it occurred through creativity, dedication, and hard work from each employee at Sezzle. But at our core, every decision we make, we consider our guiding principles as laid out on slide 4, starting with positively affecting profitability. We used to chase growth for growth's sake. We no longer do that, which is obvious from our results. A key part of profitability is increasing the lifetime value of our consumer. The launch of our Premium and Anywhere subscription products is a great example of us focusing on increasing LTV while we create products that our consumers truly love. While it may not reflect it in our absolute numbers, we are highly focused on acquiring new users. But first, we had to focus on profitability.

Over the next 6-18 months, we have several items focused on driving user acquisition, from marketing campaigns to product offerings. Last but not least, from a stakeholder perspective, driving profit and bottom-line results are important, but we also recognize that we must be good stewards. We are proud to be the only buy now, pay later company that is a certified B Corp, which espouses being good stewards for the next generation that comes after us. We expect to renew our B Corp status this summer. As mentioned earlier, we have surpassed 371,000 subscribers across Premium and Anywhere. As shown on slide 5, the amount of engagement and positive feedback has been extraordinary. Consumers have really embraced the flexibility of Anywhere, with about 32% of the orders being generated from virtual card taps at point-of-sale retailers. These are in-store transactions.

Subscribers are also, on average, making 6 more purchases a quarter than non-subscribers, which is a key part of us increasing consumer lifetime value. Further, our Anywhere members are shopping at a broad array of locations and are making everyday purchases at general merchandise retailers, grocery stores, and restaurants to meet their discretionary needs. To borrow a quote from a recent article in PYMNTS, "The data seems to suggest that buy now, pay later is simply a modern adaptation of credit in the evolving landscape of consumer finance." Again, going back to our mission, through these subscription services, we continue to financially empower the next generation on their journey through life, and our NPS scores continue to track well for Anywhere and Premium. We do see customer NPS outperformance in Anywhere relative to Premium, and we attribute this simply to the greater flexibility of Anywhere as a consumer product.

We are excited about the path forward and aren't resting on our laurels. As shown on slide 6, we recently launched Payment Streaks for consumers. We essentially gamified payments for consumers by rewarding good behavior, which marries well with our commitment to enhance the consumer experience and foster financial responsibility. It's too early to provide any color on the progress, as we have just launched the product in the last couple of weeks, but we will surely be watching closely at the impact of Streaks. We think that the new tiering system and gamification in Streaks will enhance the consumer experience and help us with consumer retention, as we'll start to have natural segmentation occur within our consumer base through the tiers attained via their payment performance. We are also making great progress with our marketplace expansion into direct product listings.

While it is still a work in progress, we are seeing it drive more engagement per square inch of mobile real estate through clicks and app sessions, which ultimately lead to better financial results and better retention of consumers. Similar to Payment Streaks, many of the improvements are very recent, so it's too early to share any quantifiable results. Our bank partnership continues to progress, and we believe we're going to have a very good relationship with our future partner. We are fully engaged across the company on completing the final steps in our pre-launch engagement. The key initial benefit of the bank partnership will be the banking-as-a-service relationship, which will allow us to unify our product construct behind a national standardization versus the state-by-state operations we work through today. The state-by-state approach has proven to limit our profitability due to some states' very restrictive lending laws.

As an example, some states don't allow any late payment fees, and others restrict the amounts and timings of fees. These numerous and diverse laws have made running our business a bit more complicated while also limiting our product's profitability. Through the bank partnership, we'll have a national banking charter behind our product that will help us pull back the restrictions, increasing the profitability of our core products. The secondary benefit of the banking partnership is that it will allow us to launch additional products that we believe will be key to future user acquisition and customer lifetime value expansion. The future benefits of this banking partnership are not included in our updated guidance, and we're not able to share the details of expected impact as we follow a conservative approach with projects like this.

We like to actualize the benefits before we pass the results into internal budgets and guidance. We're also not guiding on the timing of this going live, as half of the work is not in our hands. Slide 7 provides a sample of some of our marketing efforts. In case you're new to Sezzle, in the early stages, our marketing efforts were completely targeted towards the merchant. And while the majority of our spending is still targeted toward merchants, we are expanding our efforts to the consumer, as shown on slide 7. Our marketing team is a creative bunch, and I'm looking forward to what they come up with next. By the way, all of these efforts are evaluated based on CAC to LTV ratios. Our positive results and momentum are further reflected in some of the key non-financial metrics, as shown on slide 8.

It has been great to see us growing subscribers, increasing repeat usage, and improving consumer purchase activity in terms of frequency and total order count. As further evidence of the success of Sezzle Anywhere, which was launched in June of 2023, shoppers have been using us everywhere. In the Q1, shoppers used us at over 149,000 merchants compared to just 22,000 in the prior year. It is great to see Sezzle become a part of people's daily lives. Year-over-year, we experienced a decline in active consumers, but sequentially, the number has been flat since August. As noted last quarter, we believe it has bottomed out, and we look forward to seeing active consumer count pick up in the H2 of this year. With that, I'm happy to turn the call over to our CFO, Karen Hartje, who will go over the quarterly financial results in greater detail.

Karen?

Karen Hartje (CFO)

Thank you, Charlie, and hello to all. Onto slide 9. As referenced several times already, we had a very good start to 2024, as reflected in our year-over-year results. Total income increased 35.5% year-over-year, led by a 33% increase in UMS. Net income came in at $8 million for the quarter compared to $1.7 million the previous year. The improvement was driven by a combination of driving top-line growth through UMS growth and subscription signups while also lowering operating expenses. Those actions are further reflected in our EBITDA margin of 31.9% and our non-transaction-related costs declining to 34.5% of total income compared to 55.7% in the prior year. As shown in slide 10, we typically see a drop-off in UMS from Q4 to Q1 due to seasonality. The seasonal drop-off in UMS was consistent with what we have experienced in the last couple of years.

However, I would like to note that we did not see that same drop-off in total income, which only fell 3.9% from Q4 to Q1, as we had a pickup in subscriptions during the quarter. The combination of UMS and subscription growth drove total income higher year-over-year by 35.5%. On slide 11, transaction expense, which is primarily payment processing costs, rose to 2.4% of UMS. Although we did see an increase partially attributable to our average order value declining during the quarter compared to the prior year, we believe we can lower this back to recent historical levels as a percentage of UMS. Seasonally, Q1 is a healthier quarter for our provision because of the tax refund season. We do expect the provision for credit losses as a percentage of UMS to rise over the remainder of the year as it did in 2023.

However, we expect it to remain within a reasonable level as we continue to evaluate the balance of growth versus losses. Led by the increase in provision year-over-year, our transaction-related costs, as shown on slide 12, rose to 44.7% of total income. Nonetheless, as reflected on slide 13, we were well above our 2024 guidance of total income, less transaction-related costs of 50%. In case you haven't figured it out by now, we are not all about growth at any cost. On slide 14, you can also see that we are hyper-focused on expenses. Not only were we able to grow the top line by over 30%, but we were able to lower non-transaction-related operating costs on an absolute basis by $3.1 million, representing over a 15% decline year-over-year.

The line graph on the right side of slide 14 reflects how the combination of our unit economics and expense management are driving strong bottom-line performance. Speaking of bottom-line performance, turn to slide 15. The evidence is in the results: $8 million of net income and $15 million of adjusted EBITDA. In 2024, we have also improved our liquidity position and solidified our capacity for further growth, as evidenced by our new credit facility highlighted on slide 16. Subsequent to quarter end, we closed on a new $150 million facility with Bastion, a longtime lending partner for Sezzle. The new facility increases the size of our credit facility and significantly lowers the interest rate costs from SOFR plus 11.5% to SOFR plus 6.75%. We expect to significantly reduce interest costs going forward as the facility has a lower borrowing rate and a lower minimum utilization requirement.

All paths lead us to continuing to improve and strengthen our balance sheet. Slide 17 reflects the positive impact our bottom-line performance has had. As stockholders' equity stands at $29.6 million, and we have built an unrestricted cash position of almost $78 million compared to only $59 million at this time last year. At this point, I imagine everyone has cheated and looked ahead to our outlook on slide 18. I know I would have by now. We are happy to update previous guidance and provide some additional guidance as well. We now anticipate our total income growth rate for 2024 will be approximately 25%, resulting in total income of $200 million compared with our previous guidance of 20%. We still expect total income, less transaction-related costs, to come in around 50% for 2024. Meanwhile, we are upping our GAAP net income guidance to $30 million from $20 million.

We expect our new GAAP net income guidance to result in GAAP EPS of approximately $5. At the bottom of slide 18, we've added valuation metrics based on the ratio of our market cap to our 2024 earnings guidance and compared it to the same metric using the consensus for other popular indices. I'm sure you get the point without us stating it. We are not happy with our valuation, as we are trading at less than half of the valuation when compared to these indices. As we were hyper-focused on being profitable, we are hyper-focused on enhancing shareholder value. In addition to the $5 million stock repurchase plan we announced in December 2023, we will evaluate other capital return options for shareholders, including but not limited to dividends, incremental share repurchases, or a combination of both.

With that, I would like to turn the call over to the operator, as we are happy to take your questions. Operator, will you please open the lines for Q&A?

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press *, then 1, on your touch-tone phone. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press *, then 2. Your first question comes from Nico Sacchetti from RBC. Please go ahead.

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

Hi, everyone. How are you doing? Good. How are you doing? Outstanding. Reading through your earnings report here. I thought last report was good. You guys knocked the cover off the ball, so I just wanted to say congratulations. And thank you for breaking out the earnings per share guidance.

Charlie Youakim (CEO and Executive Chairman)

I think it really helps to clarify and expose how cheap your stock is here. So I think that's a great addition, that slide. Can you give us any information on the stock buyback as far as average price per share that was paid? Karen, do we have that detail outlined anywhere?

Karen Hartje (CFO)

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

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

Yep. I was just curious. So out of the $5 million, you bought back $3.5 million. I was just curious if you had on hand what you were paying per share on average.

Charlie Youakim (CEO and Executive Chairman)

Nico, I think you'll see that in the 10-Q coming out shortly. The detail will be in there.

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

All right. Very good. As far as, and I asked a question, but maybe just to clarify for anybody else listening. You mentioned warrants on the call.

I'm just curious, is there something outstanding that if exercised would be significantly diluted?

Karen Hartje (CFO)

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

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

Okay. Then a follow-up to that is I'm looking through the outstanding shares, and I see a jump almost of 10% in the dilutive number from the year-over-year reported 5.5, we'll call it 5.55 to almost 6. Can you educate me on what happened with the increase in dilutive shares outstanding?

Charlie Youakim (CEO and Executive Chairman)

Karen, you want to take that?

Karen Hartje (CFO)

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

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

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

Charlie Youakim (CEO and Executive Chairman)

Exactly.

Karen Hartje (CFO)

Yes.

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

Okay. Let's see. You kind of covered it, but I mean, you look at it, and it's almost shocking to see how profitable you are, especially when you get a real-life comparison with Affirm coming out this morning and showing how much they're losing on operating income. You touched on it, but I mean, my question would be just how are you able to be so profitable when other players in the exact same space and maybe it's not an apples to apples. They're doing different things, different revenue streams. And I wish there was a more eloquent way to ask.

Can you expand on just how you've been able to create so much net income off of this revenue base where others are struggling to turn a profitable penny?

Charlie Youakim (CEO and Executive Chairman)

I think each company probably has a different strategy of how to approach things depending on their cash balances, etc. Our view, though, was we always kind of talked down to the basics in the company. And I'm like, "Our view is, if you've got a lemonade stand, let's make sure that we've got a great lemonade, and we've got some great profitability on that lemonade before we start to sell it to the masses and really expand operations." And so we spent the last couple of years doing that, making sure that we've got a great lemonade. We've got some great profitability on it.

Now we want to really hit the gas, where I think some other companies view it as, "Let's just keep on hitting the gas and building the airplane while we go." And we just don't believe that's the right approach. We think that the safer approach is making sure that you've got everything in order before you start to really expand it.

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

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

Charlie Youakim (CEO and Executive Chairman)

Yeah, absolutely. I mean, our view is that we keep on working on lifetime value, increasing lifetime value of customer. And then what that does for us is we have this symbiotic relationship with merchants where we're helping them with their sales on their sites. We're also driving traffic to their sites. So we've got this fantastic symbiotic relationship with merchants.

What we can do, though, is be more aggressive with them as the consumer lifetime values of the Sezzle customer continue to increase post that purchase. So our belief is that we can continue to have strong growth while maintaining strong profitability goals of the company.

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

I mean, that's maybe a decent segue into what happened around the Walmart situation where it looks like they're trying to do this in-house. And the follow-up question would be, do you have a concentrated relationship that would be a material loss if this became commonplace? And then maybe is it do you foresee this being something that large retailers, at least, will try to just do this themselves? And then a second follow-up would be, is that a potential acquisition down the road where someone would look at buying you to incorporate you into their existing business?

Charlie Youakim (CEO and Executive Chairman)

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

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

Can you educate me on this Canadian opportunity? Same competitors that are here. Is that something that I mean, it was definitely a positive press release. Can you give any additional information on the opportunity there?

Charlie Youakim (CEO and Executive Chairman)

Yeah. I mean, I would actually recommend investors take a look at the app stores in Canada and look at the count of reviews for the competitors. First of all, not all the competitors in the United States are present in Canada. And what we tend to find is our competitors have degraded offerings in Canada because of a lack of focus in that market, where we really fight for parity in our product offering there. We view it as an important part of our overall business. So I think that we have a I guess we index higher in Canada in terms of success and size versus the US.

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

Okay. Very good.

Last question is it looks like you're sitting on a really solid balance sheet right now. In terms of the cash, are there investments that can be made to help with the growth story? Is this an appropriate number to be sitting on? Seems like you've been generating and adding to the cash position. I'm just curious what the end use is or what the end game is. We'll never make a hard rule about anything.

Charlie Youakim (CEO and Executive Chairman)

I think our view is keep on piling on cash with profitability. And then if we find an opportunity where the ROI makes sense, we'll take a deep look at it. Just like we do with our marketing initiatives, we're always looking at CAC to LTV ratios. Does this make sense? What we tend to find is that the merchant relationship is still, by far and away, the best relationship for us.

And it makes sense because of the symbiosis of the relationship. So we look at return. And I think we'd look at return with our cash. If we can find some return for it, we'll definitely take a look.

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

Okay. Well, yeah, thanks for taking my questions. Congrats again on the quarter. Any way I look at this and try to work the numbers, I mean, I'm getting close to a billion-dollar valuation. You start overlaying even conservative metrics. And so really look forward to continuing to own the company here. And I'll jump back in the queue here.

Charlie Youakim (CEO and Executive Chairman)

Thanks, Nico.

Nico Sacchetti (Financial Advisor and Certified Financial Planner)

Yep.

Operator (participant)

Once again, if you wish to ask a question, please press * 1 on your telephone keypad. We will now pause momentarily for any further questions to register. This concludes our question and answer session. I would now like to turn the conference back to Mr.

Youakim for closing remarks.

Charlie Youakim (CEO and Executive Chairman)

Thank you. In closing, I'd like to thank the Sezzle team again. We continue to all roll in the same direction, which is leading to these great results. This quarter, I'd also like to send a special shout-out to the product and engineering teams. As much of what we're seeing in these numbers is due to the amazing and innovative work created by those teams over the last 2 or so years. Great job to you all. In honor of the late Charlie Munger, I'd also like to thank the true investors out there that follow his sit-on-your-ass method to investing with Sezzle and have invested and held our shares through it all because of their belief in what we're doing as a company. Please know that we keep you in mind as we continue to innovate and deliver.

Thank you all, and have a great rest of your day. The conference is now concluded.