Sezzle - Q4 2022

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Sezzle Inc. fourth quarter 2022 results call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Charlie Youakim, Chairman and CEO. Please go ahead.

Charlie Youakim (Executive Chairman and CEO)

Hello, welcome to the Sezzle Inc. 2022 fourth quarter presentation. My name is Charlie Youakim. I'm the CEO and Executive Chairman of Sezzle, I will be leading the presentation today. I'm joined on our call by our CFO, Karen Hartje, our President, Paul Paradis, and our SEC Head, Corp Dev, and IR, Lee Brading. I'm happy to announce that in the fourth quarter, we achieved GAAP profitability. This was done as our planned improvements were still rolling through the system.

As you may recall, we told the market in our second quarter presentation that we expected to post a monthly profit on an adjusted basis by the end of the year. We exceeded that guidance with our achievement of an entire quarter of non-adjusted GAAP profitability.

As many investors that follow us know, this profitability achievement is rather unique to our industry and to tech companies in general. We got to a profitable state through a host of initiatives that we laid out to the market throughout the year. We kept investors up to date through regular monthly updates, so you can track our progress. I'm happy to say we not only met those expectations, but we exceeded the expectations that we provided to the market over the year multiple times.

I believe that we achieved it. We did it by focusing on the singular goal of profitability and by never straying from that path. For me, it was by far the most impressive achievement I've seen by a team working together in my career. It was also a lesson for me that profit is the path forward.

It's made everything easier for us as a company. Every person and every group within the organization has the same end goal. We're going to keep the path forward focused on maximizing profit for the company while providing the best service to our customers and

merchants. That doesn't mean we're straying from our B Corp philosophy. I think the themes behind being a B Corp and being a profit-maximizing company work in concert. Being a B Corp is all about serving your stakeholders and maximizing their assessment of your organization. That's something that we still do. We will still do it because great stakeholder management actually helps maximize profitability over the long term. As a large shareholder myself, that's something that's very important to me.

I wanna give our shareholders a few thoughts to keep in the back of your mind as we continue to go through the presentation. First, we believe we're just getting warmed up. We know it's not just about 2023, it's about the next five to 10 years. We're thinking about those future years and how to go from achieving profitability to $10 million in income, and then $30 million, and then $50 million, and then $100 million.

My point, we're not just trying to maximize near-term profit. We're thinking about future profit streams and about ETF models and our own self-evaluation and what we need to do to improve. Second, I want you to all be thinking about operational leverage because I know we have it, and I believe that you're gonna see it come to the forefront this year and over the next two years. This business scales wonderfully.

We can double volumes without significant additions to our OpEx. This January was basically break even from a GAAP net income perspective. That shows you where the waterline is on operational leverage. As we grow from here, we pass on the benefits of our favorable unit economics or NCM dollars for those that know us well, right through an efficient OpEx, with most of it dropping to the bottom line.

We've done a lot of the hard work and we've seen many of our competitors starting now. We've secured funding for our receivables into 2024, and we have a strong and growing liquidity position heading into the year. We've also already scaled back our business to the core markets, which we are now set on growing through a concerted effort in those markets.

Finally, despite the concerns to the contrary, we have been able to show a steep reduction in loss rates and delinquencies while still growing our revenue and income. In summary, I believe that our investors will see that we've done a great job in adjusting the business to meet the demands of this new economy. Let's get started on walking through the presentation.

If you'd like to follow along, you can find it posted on the ASX announcements page and attached as an exhibit to the Form 8-K we filed with the SEC at their website. Let's get started. Please keep in mind that all dollar amounts here are in the USD. I wanted to touch on Slide 3 quickly to reiterate the B Corp philosophy of how and why we're helping long-term investors. Our B Corp philosophy is helping guide our brand creation and delivery.

To me, Sezzle Up is the flagship behind that philosophy. We've done what no other BNPL Fintech company in the U.S. has done. We've supported young consumers by helping them build their credit scores while they use our product. We built Sezzle Up because we wanted our product to be something we'd want our own kids to use.

I know I'd want my kid building up their credit score, we added that capability to our product a couple of years ago. This product is a big win for our customers and our brand, I think we're still just at the tip of the iceberg with Up. I believe there's more we can do with Up in shaping how it can help our customers. More to come. On Slide 5, we cover some of the highlights on our financial scorecard.

As I mentioned earlier, we've grown top-line income year-over-year despite major adjustments to the business. We've also turned the company into a cash flowing and GAAP net income generating company in the fourth quarter. Like many financial critics out there, I'm not a huge fan of non-GAAP numbers.

We wanna show Adjusted EBITDA because it's a proxy for cash flow, that's working capital. You can see we set up a positive $3.9 million in EBITDA for the fourth quarter. Another common metric, Adjusted EBITDA, shows a similar positive dynamic but with an unlevered balance sheet. Total income, less transactionally related costs, is a proxy for our gross profit or NPM, as some call it. We'll be highly focused on growing this number in future quarters while keeping our OpEx flat.

The metric to the right of that is essentially our unit economics as a percentage of UMS. I always try to simplify things as I think about the business, and here's how I simplify the thinking behind that metric. For every additional $100 million in UMS we put through the business, we would add about $4.5 million in gross profit. This is where the operational leverage comes in.

On Slide 6, we cover engagement. Here it's not all peaches and cream, as you can see some of the effects of adjusting the business. While these metrics are important, I think some of these can be vanity metrics. We're not interested in vanity here at Sezzle. We're simple. We're more meat and potatoes. Active consumers and active merchants dropped year-over-year. A good portion of that drop was our choice.

We aren't interested in losing money to support vanity metrics. We made some choices that turned away consumers and merchants. We still have some more adjustments coming to the business. I believe you may continue to see these vanity metrics reduce in the coming quarters as we complete our strategic plans.

Everywhere else in the slide, we're seeing positive changes. Even though the active consumer counts have dropped, our engagement with that group has increased, both through the app and through order activity. Our marketplace, with Premium leading the way, has been a big success. That's what's driving all the increases across the page. Premium, with over 130,000 subs, is, in less than a year since launch, an important product for us and a driving force behind our financial performance.

Speaking of Sezzle Premium, if we move ahead to Slide 7, you'll see it mentioned again as one of our successful initiatives for 2022. The slide also shows the timeline of our initiatives we announced to the market. A year ago, you may remember we started the improvement process.

We announced our workforce reduction in March, and at that time, we estimated it would result in approximately $10 million in annual benefits. We improved that guidance to $17 million in improvements in April with the announcement that we intended to exit Brazil, Europe, and India.

In July, just after we exited our planned merger with Zip, we told our investors that we believed our now $50 million of initiatives would get us to a monthly adjusted profitability metric by year-end. As we point out here, we had a mix of revenue-related initiatives and cost-related initiatives in the basket.

To put it simply, we knocked it out of the park on this. Our initiatives went so well that we came back and told you all to expect another $10 million in September. Now that we've nearly finished delivering all these initiatives, we're seeing $70 million in annual improvements, a final result that was 40% better than what we guided to in July.

On Slide 8, you can see the mix of these improvements. As you can see, we shored up losses significantly, but I think it's worth noting that usually investors think they can count on cost initiatives more than revenue initiatives when a company starts talking about making improvements. We did the opposite. The vast majority of our improvements came from the revenue side with projects like Premium.

The way I think about this is that we turned our stored potential energy in the business into kinetic energy. We're not done, by the way. We're going to keep the momentum going. We'll cover our plans for 2023 in a couple slides. Because our provision was so improved incredibly over year-over-year, we wanted to dive into how we did that.

In short, it's centered around technology, a unified strategy around profit, and focus. Slide 9 covers the Prophet Model. With that name, you can get a sense that I wasn't kidding about our focus on profits. Everything and everyone in the business was focused on profits. That included the internal naming of our decisioning models. One benefit of the mistakes of the past is that they give you data on what not to do.

Our decisioning teams took the data from 2021 and prior years to create a new model, which they dubbed the Prophet Model. It's a model built on the latest machine learning technology, and it was deployed in the fourth quarter of 2022. As you can see in the callout in the bottom left, the Prophet Model gave us modeling that allowed us to effectively target a lower principal loss rate while minimizing loss volumes.

Our financial results beat our model's expectations as we posted a 1.2% provision for the fourth quarter. The Prophet Model is just another initiative from 2022 that has turned out incredibly well for the company. On Slide 10, we're giving investors some quick snapshots of our Q-on-Q improvements and a broad overview of what's to come in 2023. The quarter comparison is jaw-dropping, but the bar was low, too low.

With our profit-focused approach to business, I believe quarters like that in 2021 are going to be in our rearview. Take a look at the past four quarter numbers and especially our operating structure cost percentages. This is the area we're highly focused on here at Sezzle. As I mentioned, we're gonna be flexing our operational leverage muscles in 2023, which should drive that operating percentage down as we grow our top line and our unit economics.

The team knows that we need to stay lean. As we grow, you should see most of the dollars dropping through to GAAP income. More initiatives are coming. We guided to an additional $10 million in annual benefits to the bottom line.

We're guiding to an additional $10 million in annual benefits coming to the bottom line through the next 12-18 months, depending on how quickly we can get them launched. We're gonna be expanding Premium with our Anywhere solution, which we believe will drive additional revenue and income and please our shoppers even further.

We're also working on deepening partnerships with banks in order to drive additional revenue and income to the business. We have a few more initiatives in the mix that are leading to that $10 million improvement, but for competitive reasons, we're gonna keep the details light for now. I hope this overview has given you a good sense of what's been going on and what we plan to continue to work on in 2023. I'll now pass you over to Karen Hartje, CFO, who will cover the remaining financial metrics. Karen?

Karen Hartje (CFO)

Thanks, Charlie, and hello to all. Charlie did mention this, but just a reminder that our results are presented in U.S. dollars. Starting with Slide 12. As we discussed in our last couple of quarterly updates, during 2022, we sharpened our focus in pursuit of profitability, and our fourth quarter results reflect our strategic direction.

Fourth quarter 2022 total income was a record high of $38.3 million, up 16% from $32.9 million in fourth quarter 2021 and up 26% from $30.4 million last quarter. As a percentage of UMS, total income hit a new high in fourth quarter 2022 at 8.5% versus 5.9% in fourth quarter 2021 and 7.2% last quarter.

Consumer engagement remained strong as repeat usage increased to 94.2%. Our weekly average marketplace volume increased to 29.2% of fourth quarter 2022 volume, up 18 points from fourth quarter 2021. Fourth quarter 2022 UMS totaled $452.3 million versus $561 million in fourth quarter 2021 and $421.5 million last quarter.

The year-over-year decrease reflects credit risk improvements related to the Prophet Model that Charlie reviewed earlier and supports our strategy of reaching profitability as well as competition. Moving to Slide 13. Fourth quarter 2022 transaction expense decreased to a new low of 2.1% as a percentage of UMS, reflecting 37 basis points improvement from fourth quarter 2021. What is driving this change?

Transaction expenses comprised primarily of payment processing costs. Those costs as a percentage of UMS decreased because of our payment strategy to incent consumers to choose ACH as their primary payment option. Additionally, we renegotiated more favorable terms with our network partners and launched Pay in Full as an option for consumers at the point of sale.

To Slide 14. Our improved proprietary underwriting strategies, including the Prophet Model, drove the improvement in the fourth quarter provision for uncollectible accounts to 1.2% of UMS, 233 basis points better than the same quarter last year. Managing the portfolio risk was a key factor in reaching profitability in fourth quarter 2022.

For the full year ended December 31, 2022, provision expense was 1.7% as a percentage of UMS. We expect that rate to slightly increase in 2023 to support top line growth. Moving to slide 15. Total income less transaction-related costs reflected a new high in fourth quarter 2022 of $20.2 million or 4.5% of UMS.

This compares with a net loss of $2.2 million or negative 0.4% UMS in fourth quarter 2022. We exceeded our previous all-time high set last quarter of $13.5 million or 3.2% of UMS by nearly 50%. We speak to this non-GAAP measure because it reflects our underlying unit economics and shows the improvements in total income, transaction expenses, and the provision for uncollectible accounts that we just discussed.

With stronger unit economics, we can be more competitive in pursuit of growth opportunities in 2023. Onto Slide 16. While income less transaction-related costs improved year-over-year and quarter-over-quarter, so did non-transaction-related operating expenses.

For fourth quarter 2022, non-transaction-related expenses decreased to $18.6 million, representing a decrease of 21.4% over the same period last year, and notably reflects a 41% reduction from the peak in first quarter 2022. The 2022 reduction in workforce and cuts to third-party spend drove the improvement.

2022 full year revenue and cost initiatives drove the improvement in non-transaction-related expenses to 48.6% of total income for fourth quarter 2022 and represents a record low, which is a good thing for us. We expect to continue to leverage our operating structure in 2023. Moving to Slide 17.

Fourth quarter 2022 GAAP net income was $0.6 million positive, drawing a striking comparison to the $25.9 million net loss in fourth quarter 2021. As a reminder, third quarter 2022 net income was positive due to the $11 million payment received from Zip as part of the transaction termination. On an Adjusted EBITDA basis in non-GAAP measure, we reported $3.9 million for fourth quarter 2022 compared with -$24.5 million in fourth quarter 2021 and -$3.4 million last quarter.

We turned the corner on profitability as measured by Adjusted EBITDA for the first time in fourth quarter 2022, with stronger unit economics and a more efficient cost structure. From this quarterly chart, you can see the trend.

We plan to increase profitability for full year 2023 through sustainable top line growth and new initiatives that are expected to add over $10 million in total income over the next 18 months. On to Slide 18. As of year-end 2022, we had total cash of $69.5 million, comprised of $68.3 million in unrestricted cash and $1.2 million in restricted cash.

The fourth quarter 2022 increase of $10.8 million in cash on hand was driven by additional borrowings under the line of credit. At quarter end, we had $93.4 million in net accounts receivable and $83 million in merchant payables, including $66.5 million in the merchant interest program. Given our liquidity and positive operational performance, we do not foresee any near-term capital raises.

Now I will pass it back to Charlie to cover January and close out the presentation.

Charlie Youakim (Executive Chairman and CEO)

Thanks, Karen. I'm gonna cover our January update here as we close because despite a slight dip on the negative, the GAAP net income, I do think it shows the continued progress of the company's efforts. Please flip ahead to Slide 20. In January, we saw a decline in UMS versus the holiday period, which isn't surprising.

What is great is that we're displaying how our shifts in the business model have really strengthened our numbers. As we displayed in December, we're still doing about a 10% top line on our UMS through the system, which led to $11.7 million in top line total income and basically a break even in GAAP net income. Our Adjusted EBITDA came in at about $1 million, which gives you the proxy for cash flow. We're still winning there.

It's just the offsetting stock-based comp and other additional non-cash items that are driving us to the negative. January was still healthy given our economic environment. I think what is really important to think about here is that January is the water line for what it will take to drive monthly net income. Keep these numbers in mind.

We do about 10% in top line off of our UMS, and we do about 4.5% for our gross margin equivalent. My illustration here is all on a rough basis. With those numbers in mind, put through an additional $20 million in UMS through January. If that occurred, we'd add a rough $2 million top line income and almost $1 million gross margin or in $10. We wouldn't need to do anything significant to OpEx to support that.

As you let that sink in, you can start to see how we're thinking about running this business. We're going to be working on making that illustrative example a reality each and every month. Thank you all for listening in. We'll now hand it back to the moderator for Q&A.

Operator (participant)

Thank you. If you wish to ask a question, you will need to press the star key followed by one on your telephone keypad. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Chris Brendler from D.A. Davidson. Please go ahead.

Chris Brendler (Analyst)

Hi. Thanks, and good morning. Fantastic results, Charlie and Karen. Congratulations on the progress. I wanted to start with the discussion of provision expense for 2023. Does that sort of suggest you think you should provide more to support growth? Is that widening the credit aperture, finding new merchants, or is there also a macro component to that provision expense forecast? Thanks.

Charlie Youakim (Executive Chairman and CEO)

Karen, do you wanna cover that?

Karen Hartje (CFO)

The slight increase that we talked about in provision expense is generally related to pursuing our top line growth. We believe that with the additional products that we've offered that have strengthened our margin, we'll be in a more competitive position to, you know, present options to our enterprise prospects.

Charlie Youakim (Executive Chairman and CEO)

Chris, I think in terms of you know, the provision and, you know, basically for the, for the projections, you know, being at that level, we do expect to be a little bit more aggressive now we're going after things. I think we're also being a bit conservative compared to fourth quarter. You know, you saw the top of model, our predictive modeling system had numbers that were slightly higher than what we actually printed for the fourth quarter. I think we're just trying to be reasonable and measured as well in our expectations for the upcoming year.

Chris Brendler (Analyst)

Makes a lot of sense. I guess I'm curious, like, you know, I guess the next question is, as you sort of increase the provision aperture to support growth, you know, what's the timeline you think on getting back to UMS growth? I know you've made a lot of progress on the profitability side, and it's been a transition, but I would imagine you start to get easy comps, you know, as the year progresses. It feels important that, I think, that the UMS growth is sort of a key focus for 2023.

Charlie Youakim (Executive Chairman and CEO)

Absolutely. I'd say UMS growth is one of the key areas. As we mentioned, profits is the key. When we're looking at UMS growth, we're not, you know, gonna be pushing for UMS growth at the expense of profits. It'll all be profitable.

As we pointed out in the release, we're already seeing growth just January to February, 8% month-on-month, you know, just early here in the year. Obviously the first two months coming out of the holiday season for a company that's, you know, quite tied to retail, where we expect some of this drop. Our view is that this is basically the waterline, and we're growing from here.

Chris Brendler (Analyst)

Just one last follow-up on that topic is, as you target growth in UMS as the year progresses, you think it's more, you know, approving more consumers, adding more consumers, activating more consumers or is growing the merchant footprint as bigger focus?

Charlie Youakim (Executive Chairman and CEO)

you know, I think growing our subscription product Premium on our marketplace, that's part of it. also, you know, really going after merchants again. You know, I don't know, Paul, you wanna hop in and discuss some of the, you know, thoughts we have towards merchant growth.

I mean, that's really, Chris, where it comes into for us, is we've always been a business that's been two-sided, you know, adding merchant plus we've had consumers. We don't do any direct to consumer advertising. It's all through our partnerships. Paul, anything to add?

Paul Paradis (President)

I think you nailed it there at the end. I think, as opposed to some of our competition, which have done a lot of direct to consumer advertising, we've really relied almost solely on our merchant relationships. The growth in UMS, growth in customers is gonna come from new merchant growth as well as just getting better presentment from our existing merchants as well.

You know, there were several major headwinds to UMS and merchant acquisition this past year that we believe were short-lived. You know, we made several decisions that impacted our ability to grow, including off-boarding merchants, repricing merchants that were in the queue, more conservative underwriting.

You know, I think the planned merge with Zip also made it difficult for us to acquire new merchants because merchants were concerned with the longevity of our brand and our platform, and so they didn't wanna install Sezzle and then have to install a new platform, you know, two, three months down the line.

Now that we have our own clear path and also improved unit economics with our product to make us more competitive in market, then we'll be able to start acquiring new merchants in a much faster pace, starting, you know, immediately.

Chris Brendler (Analyst)

Yeah. I'm sure it also helps that you're profitable and growing and, you know, and being here for a long time. Congratulations again. Thanks for taking the questions.

Charlie Youakim (Executive Chairman and CEO)

Yeah, Chris, I mean, that's worth pointing out to everyone listening on the call. I think, you know, when you're talking to enterprise merchants especially, they wanna know you're gonna be there. They wanna know you're gonna be there for the next two, three, four, five years. There's nothing better than telling the merchant you're gonna be there than being profitable right now.

Paul Paradis (President)

Absolutely.

Operator (participant)

Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Phil Chippindale from Ord Minnett. Please go ahead.

Phillip Chippindale (Analyst)

Hi. Good morning, Charlie and team. Thanks for your time. First question, Charlie, you've referenced the expanding of the Premium product earlier in your presentation, and I think you did mention the Anywhere product as well. Can you just expand on that? What are you referencing there on the Premium side of things?

Charlie Youakim (Executive Chairman and CEO)

Thanks, Phil. Those two are tied together, the Sezzle Anywhere and expanding Sezzle Premium. Currently the way Sezzle Premium works is that customers can get access. You know, the way I think about our business is Sezzle Premium is the access portion of the business and app is the financial empowerment portion of our business.

Those are two flagships that we have behind us in the branding and in our approach to business. Right now with Sezzle Premium, the access is all driven through our app. You have to shop through our app to get access to merchants like Amazon or Walmart or Lowe's, et cetera. What we do realize though that that's still limited. Customers wanna be able to shop everywhere.

Our thought was to expand Premium even one step further with an Anywhere card for Premium that allows the customer to shop outside the app. I always, you know, give the example of the dog groomer. If one of our customers wants to go to the dog groomer, there's probably zero chance we're gonna have that in our app. Now they can use it at that location and use Pay in Full where they wanna use it. That's what we're thinking about in terms of expanding the product and just continue to meet the demands of the customer.

Phillip Chippindale (Analyst)

Okay. Great. Last question from me is just about average income you are recognizing. Your January update, you've said, total income reached 10% of your UMS. What's driven that latest leg up to that 10% mark? I mean, I know you've reached the 9% range more recently, but clearly you continue to surprise us to the upside there.

Charlie Youakim (Executive Chairman and CEO)

I think it's basically all the initiatives. Marketplace is a big part of it. Premium and marketplace, driving customers into the app where you can drive additional affiliate revenue, that's a big part of it as well. Premium is an incredibly strong product in terms of top line percentage.

The more we drive consumers into Premium, the more that we'll find that we push that. You know, maybe we're at more of a steady state. You know, December was about the same number as January. We're more at, you know, at some sort of the 10% steady state right now, but that is definitely top of mind for us as a company.

As we're thinking about, growing the business, we wanna keep on pushing for higher margin products in the mix, which will continue to potentially help push that number even further north.

Phillip Chippindale (Analyst)

Okay. Thanks. That's all from me.

Charlie Youakim (Executive Chairman and CEO)

Thanks, Phil.

Operator (participant)

Thank you. There are no further questions at this time. I'll now hand back to Mr. Youakim for closing remarks.

Charlie Youakim (Executive Chairman and CEO)

Thank you. In closing, I again wanted to thank our team at Sezzle for their incredibly good work over this past year. The team has been absolutely amazing. As I mentioned, it's been really fun to work alongside everyone on this.

I'd also like to thank the investors that continue to support us. I hope that you're smiling ear to ear as we complete this presentation. As an investor myself in the company, I'm also incredibly happy with this result. Thank you all for your support, and have a great day.

Operator (participant)

That does conclude our conference for today. Thank you for participating. You may now disconnect.