PROG Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 9 speakers on the call.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Prague Holdings First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. At this time, I would like to turn the conference over to Mr.

Operator

John Baugh, Vice President of Investor Relations. Mr. Baugh, you may begin.

Speaker 1

Thank you, and good morning, everyone. Welcome to the Prague Holdings Q1 2023 earnings call. Joining me this morning are Steve Michaels, Prague Holdings' President and 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, which is available on our Investor Relations website, investor. Progholdings.com.

Speaker 1

During this call, certain statements we make will be forward looking, including comments regarding our expectations related to the range of 2023 write offs resulting from our lease decisioning posture, Our GMV, gross lease assets balance and levels of 90 day buyouts in future periods. The strength of our balance sheet and our capital allocation priorities and our revised outlook for the 2023 full year as well as our outlook for the Q2 of 2023. I want to call your attention to our Safe Harbor provision for forward looking statements They can be found at the end of the earnings press release that we issued earlier this morning. That Safe Harbor provision identifies risks That may cause actual results to differ materially from the expectations discussed in our forward looking statements. There are additional risks that can be found in our annual report on Form 10 ks for the year ended December 31, 2022, which we encourage you to read.

Speaker 1

Listeners are cautioned not to place undue emphasis on forward looking statements we make today 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 adjusted EBITDA 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 periods and to assist them and understanding the company's ongoing operational performance.

Speaker 2

With that, I would like to

Speaker 1

turn the call over to Steve Michaels, Cronk Holdings' President and Chief Executive Officer. Steve?

Speaker 2

Thank you, John, and good morning, everyone. I appreciate you joining us as we report our Q1 results, share our thoughts on a few important Q2 metrics and provide an update on our 2023 full year financial outlook. We had an excellent first quarter, meeting our expectations for GMV and net revenues. We also materially exceeded our earnings expectations due to lower 90 day buyouts, Better than expected customer payment behavior and continued portfolio management. Last 36 months have presented unprecedented challenges, But I'm proud of our team's efforts in overcoming these obstacles to deliver such strong results.

Speaker 2

Our actions to improve portfolio performance and rightsize costs in Q2 of last year continue to benefit us as evidenced by our year over year gross margin expansion, Improved write offs of 6% and SG and A leverage. Despite consolidated revenues declining 8%, We still grew our adjusted EBITDA by $25,000,000 or 39% from a 13.7% margin Our non GAAP EPS by 94.7% as compared to the Q1 of 2022. This great start to the year has led us to significantly raise our full year earnings outlook. While we were pleased with our strong Q1 results, there were factors contributing to our outperformance that may not carry forward, which Brian will discuss in more detail. Still, our Q1 demonstrates our ability to manage our business with healthy returns despite a persistent macroeconomic backdrop of inflationary pressures, economic instability and strained customer liquidity.

Speaker 2

We remain cautiously optimistic about our portfolio health And gross margin, while we are prepared to optimize our decisioning to shift in the economic environment, we believe that our current decisioning positions us to deliver another year within our targeted annual 6% to 8% write off range, which is a key goalpost. Turning to our GMV, The double digit declines over the past 3 quarters are largely a byproduct of tighter decisioning we implemented in Q2 of last year. We believe that those decisioning changes have accounted for approximately 2 thirds of the pressure we've experienced at GMV over the past 3 quarters. In terms of GMV outlook, we expect our 2nd quarter GMV to decline at a similar rate to Q1 on a year over year basis due to our current decisioning posture. So we expect these difficult comparisons to ease in the back half of the year As we fully lap the introduction of last year's decisioning changes, soft pretill demand continues for big ticket consumer durables in many of our lease Product categories with data showing that this slowing demand is primarily due to our consumer base redirecting more of their income to essentials In response to liquidity pressures, we have seen no indicators leading us to assume that retail sales will materially rebound through the balance of 2023.

Speaker 2

We have very recently begun to see evidence that credit providers above us are starting to tighten their underwriting. The recent challenges in the banking sector that developed late in Q1 further speaks to the likelihood that credit providers will increasingly look to restrict the level of funding that fueled consumer borrowing for most of the past decade. Delinquencies that we track for prime lenders are moving higher, albeit in many cases still below pre pandemic levels. While we believe the credit supply is becoming more restricted, There may be some delay as to when it will impact consumers. Because it is still too early to predict the timing of this potential tailwind for our business, We have not assumed any benefit to our GMV for the balance of 2023.

Speaker 2

We continue to closely track the overall quality of our applicant pools and only very recently have we started to see improvements in the top quintile. Moving on to profitability, We expect to maintain our strong portfolio performance and our ability to deliver healthy margins in our core leasing business despite the outlook for our revenues to decline near term. The tighter decisioning posture we took in Q2 of last year helped the portfolio recover with leases originated in the second half of the year performing on par with Because of our short duration portfolio, leases originated in the first half of twenty twenty two Now represent an immaterial portion of our remaining active leases. In February, we elaborated on our 3 key strategic pillars, grow, enhance and expand. We believe our strong profitability and balance sheet will allow us to continue to make selective growth investments that position us to capitalize on market share gains in the near term, while capturing more of our addressable market in the long term.

Speaker 2

For example, those investments will allow us to continue to build and enhance our technologies for an evolving consumer that we know better than anyone after more than 20 years as a VLTO leader. Today, roughly 2 thirds of our customers are millennial or Gen Z, Groups that have shown a more omni channel approach, vacillating between online and in store when researching and making key purchases. We also know these demographics interact with their personal finances differently than previous generations, adopting emerging products and technologies as As a result, today's consumers have come to expect more flexibility and control over their payment options, especially for larger ticket items. We continue to address this demand by enhancing and developing products that offer a more frictionless omni channel customer journey, while simultaneously providing consumers with the educational tools, price discovery and disclosure transparency They need to help them make the best and most informed choices. We also continue to invest in further integration with existing retail partners, While converting new lease to own pipeline opportunities, as we believe these actions will benefit all stakeholders long term, even with the challenging revenue backdrop in 2023.

Speaker 2

E commerce integrations with new and existing partners remain a key focus and the pace of our efforts in this area has accelerated As we continue to enhance and innovate technologies that offer retailers flexible, customizable and secure ways to add LTOs to their online checkouts. While e commerce GMV in Q1 was down year over year, that decline was less than what we saw for comparable in store results And e commerce as a percentage of total Progressive Leasing GMV continued to grow coming in 100 basis points higher than the same period last year. Additional key technology initiatives that were completed within the quarter include enhancements to decrease the time it takes customers to complete an LTO transaction, Optimizations to the customer and retailer experience and updates to payment and lease systems. While Ryan will provide more detail on the upward revision to our earnings outlook for the year, I'd like to summarize a few key themes. Our Q1 performance was stronger than we expected from a margin perspective, driven by materially low 90 day buyouts and better than expected customer payment behavior.

Speaker 2

Revenue in March from 90 day buyouts was at a historic low, which we believe was driven by the average tax refund decrease of approximately 10% year over year. While this was a tailwind for Q1 gross margin, it will be important to monitor whether the low buyout performance continues and how the portfolio performs with a lower percentage of customers executing buyout options. Should we see normal delinquency trends in the lease pools for the remainder of 2023, the lower 90 day buyouts we experienced should be a positive impact to our financial results. However, should the decline in 90 day buyouts prove to be a leading indicator of stress on our customers and portfolio performance, we may experience higher delinquencies, which could prompt us to tighten our decision. Onto the topic of capital allocation, we purchased $36,500,000 in shares during the Q1, representing 3% of our outstanding stock.

Speaker 2

We also generated $157,400,000 in cash flow from operations, further illustrating our ability to show financial strength in an unstable economic environment. Our capital allocation priorities remain unchanged and we expect to continue to fund growth, look for strategic M and A opportunities and return excess cash to shareholders primarily through share repurchases. To close, I want to emphasize that our strong Q1 was a direct result of The hard work and strategic efforts that our teams have put in over the past several quarters. Our mission to create a better today and unlock the possibilities of tomorrow through financial empowerment remains at the core of how we operate and we will continue to grow, enhance and expand to help improve the lives of our customers. I'll now turn the call over to our CFO, Brian Garner for more details on our Q1 results Thank you, Steve, and good morning, everyone.

Speaker 2

I'd like to start by thanking our teams, retail partners And customers for helping us deliver a strong quarter to start the year. Our first quarter results highlight the resilience of our business model and teams in overcoming the macroeconomic headwinds, including inflationary pressures and liquidity strains experienced by our consumer. Q1 2023 consolidated revenues declined 8% to 655,000,000 Consolidated adjusted EBITDA increased approximately 39 percent to $89,700,000 in Q1 of 2023 from $64,600,000 in Q1 of 2022, outperforming our expectations. Our better than expected consolidated results were primarily driven by margin improvement and lower write offs at our Progressive Leasing segment. Non GAAP diluted EPS Q1 of 2023 increased to $1.11 growing 94.7 percent from $0.57 in Q1 of 2022.

Speaker 2

Liquidity pressure on our customer, partially driven by tax refund checks that were approximately 10% lower on average compared to last year, Resulted in a record low 90 day buyout activity in Q1, which is a headwind to current period revenue, but a benefit to gross margins. Additionally, we experienced lower than expected charge offs in the quarter due to our tightening efforts in Q2 of last year, which resulted in better payment performance, driving higher margins and increased profitability. For our Progressive Leachies segment, GMV decreased 17% to $418,700,000 in Q1 of 2023 as compared to $504,500,000 in Q1 of 2022, largely driven by our current decisioning posture, continued weak retail traffic And the double digit percentage decline in tax refunds.

Speaker 3

Revenue in

Speaker 2

the period declined 8% year over year, driven by lower gross leased asset balance heading into Q1, softer GMV in the quarter and a material decline in revenue from 90 day buyouts, partially offset by improved customer payment behavior. However, the segment's Q1 gross margins improved 3.40 basis points year over year to 31.7 percent primarily due to the 90 day buy activity in Q1 that reached record lows And last year's decision actions that improved portfolio yield. While a 90 day buyout results with significantly lower gross margin than an average lease, it It remains more beneficial to gross margin than most charge offs. We still expect 90 day buyout activity to be lower year over year For the remainder of 2023, although the variance is expected to narrow over the course of the year. Progressive Solutions SG and A expense as a percentage of revenue declined to 11.9% in Q1 of 2023 12.4 percent in Q1 of 2022, while SG and A expense decreased $10,000,000 year over year, primarily due to the cost actions In Q2 of last year.

Speaker 2

For Russell, we should brine off the $38,400,000 or 6% of revenues in Q1, down from 7.3% in the previous year's period. I continue to be encouraged by the trends we've seen thus far in 2023 and we remain on track to end the year within our targeted annual write off range. Looking at our balance sheet, we ended the quarter with $249,800,000 in cash And gross debt of $600,000,000 resulting in the net leverage ratio of 1.24 times our trailing 12 months adjusted EBITDA. In the Q1, we purchased 1,460,000 shares of our common stock at a weighted average price of $25 and have $300,800,000 remaining under our previously authorized $1,000,000,000 share repurchase program. I'd now like to touch on a few key aspects of our Q2 and revised full year 2023 outlook, which were provided in this morning's earnings release.

Speaker 2

Despite our strong first quarter results for adjusted EBITDA, We continue to experience headwinds on expected GMV due to economic and liquidity pressures felt by our consumers. As Steve mentioned, we expect the year over year percentage decline of our 2nd quarter GMV to be roughly in line with our Q1 rate. This decline should lessen in the second half of twenty twenty three as we compare against lower GMV year over year due to the timing decisions we implemented last year. Our gross leased asset balance, which is a key driver of future period revenue, entered 2023 5.3% lower Year over year ended the Q1 8.3 percent lower year over year. This gross leased asset balance will likely decline further For the Q2 of 2023 due to the GMV decline serving as a headwind to revenues in future periods.

Speaker 2

Our base case for the remainder of the year considers current consumer trends, but does not assume further economic downturn, A materially negative impact on the employment of our consumers or a material benefit from tightening by providers above us in the credit stack. Despite revenue headwinds, we anticipate that our leased portfolio performance and low 90 day buyout rates We'll continue to drive Progressive Leases margin improvement year over year. As a result, we are raising our full year earnings outlook and slightly decreasing our expected revenues. Our revised consolidated outlook for 2023 expects revenue in the range $2,300,000 to $2,375,000,000 adjusted EBITDA to be in the range of $235,000,000 to 255,000,000 And non GAAP EPS in the range of $2.50 to $2.77 This outlook assumes a difficult operating environment with continued soft demand for leasable consumer durable goods. No material changes in the company's decisioning posture An effective tax rate for non GAAP EPS of approximately 28% and no impact from additional share repurchases.

Speaker 2

Finally, I would like to address how we're thinking about the strength of the Q1 and our increased earnings outlook as they pertain to the remainder of the year. While we are encouraged by the strong financial results that we achieved in Q1, we are cautious about the continuing headwinds on GMV and margin pressures as we move throughout the year. Soft consumer demand trends we observed exiting Q1 and into April Have caused us to adjust downward on our expectations for GMV and revenue. Our revised outlook assumes just EBITDA margins for the remainder of the year that are lower than Q1 due to the dissipation of some of the 90 day buyout dynamic that benefited margins in Q1, An increase in run rate for SG and A costs due to wage inflation and specific initiatives targeting key technology platforms and full year write offs within our targeted annual 6% to 8% range. In short, we're optimistic about the 2023 prospects Following our strong start to the year and remain committed to the disciplined decisioning and other strategic efforts that have helped us achieve those results as I will now turn the call back over to the operator for the Q and A portion of the call.

Speaker 2

Operator?

Operator

Our first question or comment comes from the line of Kyle Joseph

Speaker 3

Good job navigating a difficult environment. Obviously, on the credit side of things, a lot of moving parts. You guys have your underwriting changes Implemented last year, lower tax refunds this year, but just trying to get a sense for the health of the underlying consumer. Obviously, they're Employees, but facing elevated expenses, have they kind of adapted to this inflationary environment as we've been in for Going on a year now, but just kind of want to get a sense for some of the dynamics that played out in the quarter given some of the moving parts.

Speaker 2

Yes. Thanks, Kyle. Good morning. This is Steve. There's certainly a lot there.

Speaker 2

We did, as you mentioned, make our decisioning changes Throughout Q2 of last year and the portfolio has responded nicely and as expected to those changes. Underlying that is the consumers and the customers that we were approving and having funded GMV were performing Per our expectations, which as you know, we track kind of against the pre pandemic pool performance, because we have history that those Pools delivered our portfolio performance within our targeted ranges. So throughout the back half of 'twenty two, We saw that performance and that the portfolio turned over due to our short duration leases. It was reflected in the metrics that we provide externally. Q1 was an interesting story, right?

Speaker 2

We saw From a portfolio performance standpoint, similar trends as expected, although Slightly better than expected from a customer payment behavior standpoint. The wildcard was the tax refund, what we believe was driven by Tax refund season, we expected it to be lower and as many of you all report fairly frequently, it did come in lower. We built that into our original outlook as it related to some pressure on GMV, just kind of On the origination side, what we saw and it's not a perfect read through, but it's our Just our experience and our history dictates this or leads us to believe that this driver is that Those lower refunds were the primary driver of a materially lower 90 day buyout activity by our consumer. And as Brian and I both said in our prepared remarks, that resulted in higher gross margin than we were Anticipating and that we have seen in previous tax refund seasons. The question that is It remains to play out is why did the 90 React so materially lower, was it due to some new set of stress on the consumer That caused them to not have the liquidity to do the 90 day buyout.

Speaker 2

And while we're in this kind of interesting Situation right now where we had lower NABIOS, which was a tailwind to margin, yet our delinquency picture is still In good shape. Will that persist? And we need a few more cycles of data that come through to convince us That will persist because it's we believe it's naive to think that someone who did a 90 day or would have done a 90 day and wasn't able to It's just going to magically march on to be a full term, full margin lease. There's going to be some other Stress and dispositions throughout that customer's life cycle that didn't do the 90 days. So that remains to play out.

Speaker 2

So it's still a little bit of a mixed bag. We had strong performance in Q1. If that persists, we're going to have some tailwinds to margin throughout the balance of the year. We're anticipating that customer payment performance outperformance dissipate.

Speaker 3

That's really helpful clarification. And then just one follow-up from me. I know you guys talked to a lot of retail partners and just want to get I guess, first, kind of their take in terms of the potential for demand to recover. Do we have any precedence? Do we have to go back and look at The 70s and see how long it took for kind of consumer durables to recover.

Speaker 3

And then in this More challenging environment, have you seen a greater desire to add the products from new retailers?

Speaker 2

Yes. I've been in the business a long time and not since 70s. But we definitely talk to our retailers Very frequently, as you can imagine, and it's one of the benefits of us having the large enterprise retail partners. They have sophisticated shops. And obviously, we're not going to Out there on what they say and what they tell us, but it's a challenging environment out there.

Speaker 2

And as Brian said in his prepared remarks, we saw Some weakness really exiting March and into April. And I would not make a direct correlation SVB and the banking crisis to our consumer because I'm not sure they're impacted by that, but something from a Animal spiritconsumer confidence happened and we saw some weakness coming out of Q1 and into the 1st few weeks of April. So as we alluded to, we've got the lapping of our decisioning changes here towards the end of Q2. So that will be a removal of the headwinds, but it continues to be a challenge demand environment for our retailers and then ultimately for us.

Speaker 3

Got it. Thanks very much for answering my questions.

Operator

Thank you. Our next question or comment comes from the line of Brad Thomas from KeyBanc. Mr. Thomas, your line is open.

Speaker 4

Thanks. Good morning and nice execution here. Let me add my comments in that regard as well. I want to ask first about the gross margin outlook. Even though there were lower rates on tax refunds year over year And year over year that produced early buyouts.

Speaker 4

I know that 1Q is usually the big quarter for that. So as I look out at the balance of the year, it does look like there's a pretty good outlook here for gross margin. Maybe you could just talk a little bit more about how you're thinking about that?

Speaker 2

Thanks. Brad, I can take that. Yes, I think that's driven by primarily by our assumptions around How these customers behave, those that did not take the 90 day here in Q1 and ultimately the dispositions that they work towards, We expect to be a more favorable mix. Based upon what we're seeing thus far and where our delinquency profile is sitting, We're more optimistic around those customers who are reluctant not to do a 90 day to go into an outcome that is favorable to gross margins. So we've incorporated that into our guide and that's what you're seeing in terms of the I think the trends that are reflected and the favorable gross margin trends going forward.

Speaker 2

So, we'll see what happens. Obviously, this is the model is very sensitive to consumer behavior and What they elect to do, based on everything we're seeing right now, delinquencies are holding, I would say, within our

Speaker 4

That's really helpful, Brian. And then Steve, I'd just be curious a little more color as you're talking to your Retail company customers, many of which are dealing with declines in sales right now coming off of tough Pandemic comparisons, I guess, what do they need most from Progressive here right now? And how do you think about maybe the opportunity to get more share of wallet with them?

Speaker 2

Yes. Thanks, Brad. Yes, I mean, it continued it existed in 2022. It continues Into this year, our partnering well with the resellers that are currently in our preferred partner network And then reaching as we've discussed before for more tools in the tool belt. And so what they need from us obviously is for us to drive more traffic to them and also save more sales and can convert more to them and also save more sales and convert more traffic and ultimately increase Their sales and return on ad spend and the way we can do that is by making these payment types in Progressive more Visible within their environment, whether it's on the site or in the store, easier for the consumer to do business With Progressive also increased training efforts for the retail sales associates In the retailers in store environment, so all the whether it be point of purchase material for awareness, whether it be Direct co branded marketing with Progressive and the retailer, Whether it be a product partner week or perk week as we call it, where we have daily deals sponsored by various partners.

Speaker 2

Those things are things that we can do that may not take A lot of tech lift. And then on the other end of the spectrum or sliding scale, I should say, are other things like Waterfalls and transactionalecom carts and better Placement on product display pages online and those things we're also seeing a lot of appetite from our retailers To partner with us and pull those levers to help save more sales for them. So we're encouraged by the partnership that we've had and we believe that this environment will allow us We come out of this environment with much deeper integrations with our existing partners and kind of be a springboard for growth when That underlying demand returns.

Speaker 4

That's great. Thanks so much.

Operator

Thank you. Our next question or comment comes from the line of Anthony Chukumba from Loop Capital. Mr. Chukumba, your line is open.

Speaker 5

And great job on the pronunciation of my last name. So I guess my first question. So you talked about the fact that you started tightening in the back half of last year and given The short duration of your leases, most of those sort of pre tightening leases are pretty much gone by this point. So would that imply then that your lease merchandise write off rate for the remainder of this year, I know you're saying That's 6% to 8% range, but that would imply to me that it should be everything else being equal toward the low end of that range, right? I mean, I guess, am I thinking about that the right way?

Speaker 2

I mean, I guess what I'd point you towards, Ed, it's Brian, What we've been targeting towards in our decisioning efforts is really trying to get back to pre pandemic level of Performance in terms of our last point of normal. And as you saw during those periods, we were kind of in the midpoint About 6% to 8% range. And so really that's our target. I don't want to overpromise on the low end. Here we saw a base 6% here in Q1, which is great.

Speaker 2

But seasonally, what you would expect Is sequential step up in Q2 and Q3 just as you get further away from tax season and you Experience perhaps just more strain on the consumer, the further away you get from taxes. And Q4 tends to be the lowest Right off rates seasonally. So I would just caution you about taking Q1 and Stating that as a run rate and making sure we're incorporating the seasonality there. Again, we're really trying to get back to in the range of reasonableness that we saw pre pandemic.

Speaker 5

Got it. Fair enough. And then just a quick follow-up. Obviously, you increased your earnings guidance and GMV will Remain pressured for the reason that you mentioned. So that would imply that and I know you didn't give free cash flow guidance, but that would imply that you'll have incredibly strong free cash flow this year and Your leverage is at 1.2 times.

Speaker 5

So I guess how should we think about capital allocation for the remainder of this year? I mean, is it a reasonable assumption that you'll I know you're not building to our guidance, but is it a reasonable assumption that could at least potentially step up your share repurchases given those free cash flow dynamics?

Speaker 2

Yes, Anthony. I mean, you nailed kind of the variables. We talk about our capital allocation. We're able to fund growth with internally generated cash. We've our history has shown that We favor repurchases of our stock as the way to return capital to shareholders.

Speaker 2

We will have Good free cash flow generation this year. Reminder, there's a little bit of seasonality on that as well, where we will generate we will likely generate more than 100% of our Annual free cash flow in the 1st 6 months of the year, just because of the seasonality of GMV, even in a declining GMV environment, the dollars of GMV will be higher In Q4, and we also look at that through the lens of our net leverage ratio And we're in a comfortable spot at 1.24 times as of threethirty 1. But we look at that over the course of a 12 month period and It's probably going to pick up a little bit just because of the use of cash in the back half for GMV funding as well as some seasonality on the EBITDA. But having said all that, we should the equity remain in these price ranges that We deem attractive. That has been our preferred vehicle and I would expect it to continue to be.

Speaker 6

Got it. Thank you.

Speaker 5

Good luck with the rest of the year.

Speaker 2

Thank you, Alain.

Operator

Thank you. Our next question or comment comes from the line of Bobby Griffin from Raymond James. Mr. Griffin, your line is open. Yes.

Speaker 6

Good morning, everybody. Thanks for I guess, Steve, I want to first circle back on GMV. I think in your prepared remarks, you mentioned that 2 thirds of the decline was driven by Your internal leasing decisions, I want to maybe see if you could unpack that a little. Does that mean you're seeing outflow and kind of demand to use the Product stronger than what the GMV trends that we're seeing on a reported basis are or how exactly are you kind of getting at that figure?

Speaker 2

Yes. I mean, we do we analyze all of our channel metrics, top funnel, mid funnel, bottom funnel, source, whether it be Online, in store, we even try and parse out whether it's from someone's phone while they're in the store And we analyze all those outflows. So we can look at our apps by channel and Then kind of just follow it down the funnel and say, okay, well, your approval rate is X, whereas same period last year, it was Y. Conversion has done this or that, and average ticket has changed this or that. So Well, that's how we get to kind of the rough 2 thirds analysis of the GMV pressure Was from effectively in simplistic terms just lower approval rates.

Speaker 2

There's a lot of moving parts as Was implied in your question, but that is the driving factor. And so as we turn the page into the back half of this year, we will be On a neutral footing, all things being equal, as it relates to decisioning. And so then it will be more of An app and underlying retail demand story. But as I've talked about before, we stand ready to Potentially loosen approval rates if the data warrant or if we seek additional stress in the data. We also have a series of adjustments at the ready if we had to tighten additionally.

Speaker 2

But all other things being equal, that headwind will go away in the back half.

Speaker 6

Okay. Yes, and I guess that was going to be my second part of the question. I guess with that, that would imply that there is a greater demand and I guess We can approve that during the current economic environment for the product. But I guess, what would you want to see economically to maybe start to loosen a to go after that delta, that gap between your app flow and what the GMV's performance at, is it loss ratios continue to hang out here at the bottom of the range 6% or is it some type of payment trends or some type of category performance? I guess, like what would you like to see where we can kind of maybe get a view of when there could be maybe a chance to potentially loosen and change the GMV.

Speaker 2

Yes. I mean, Ultimately, the loss rates are over time are a good indicator. But in the shorter term, there's Components to that, there's reserve buildup or reserve release versus underlying lease performance. And obviously, the reserves are built based on our expectations of how the leases are going to perform. But we're tracking delinquencies against pre pandemic buckets or should say lease pools.

Speaker 2

We're tracking all the indicators that you would think we're tracking, ACH bounces and the 1st payment defaults and all kinds of things. If you were just looking in isolation on March 15 at our lease pools, you would say, okay, it's time to loosen. But There's more nuance to it than that because as we as I talked about it in Kyle's question, we don't want to Naively create another pig going through the pipeline if there's liquidity stress out there for the consumer, because of Something happened why they weren't executing those 90 day buyouts and Goldilocks situations don't last forever. So we're defensively postured. We think that's appropriate.

Speaker 2

But as I've said, and as it sounds like you want us to be doing, we're looking Opportunities to loosen and if the data warrant that and prove to us that that's the appropriate decision, Then I stand ready to do it. And so we're just going to have to get a few more cycles of data in the door before the team feels comfortable doing that. Okay. Yes, that's the answer.

Speaker 6

I was just looking for it. Yes, it makes perfect sense. And I guess lastly, just Brian, on cash OpEx, Was the comments meant to imply that cash OpEx is probably going to step up sequentially from the 1Q levels Despite kind of, I guess, the revenue coming down a little bit and that's some of the margin pressure sequentially?

Speaker 2

From a you're speaking from a cash flow from operations perspective?

Speaker 6

Yes. I just look at cash OpEx. I just look at OpEx ex Right offs, the cash

Speaker 2

Yes, sorry, I got you. I think that's I think there's going to be A step up in SG and A as a percentage of revenue has moved throughout the year. There's a couple of reasons for that. There's wage inflation that We're dealing with and there's also an element as you feel those top line pressures, there's a deleveraging aspect That happens with respect to that ratio. And we are while we are highly variable in our cost structure, we do have some fixed costs And that will start to reflect in that metric.

Speaker 2

So yes, to answer your question, I think there's going to be, I would say a moderate increase in from Q1 run rate levels.

Speaker 6

Okay. I appreciate all the details. Congrats

Operator

Our next question or comment comes from the line of Jason Haas from Bank of America. Mr. Haas, your line is open.

Speaker 7

Hey, great. Good morning and thanks for taking my questions. I'm curious to know, to what extent do you think the current results are benefiting From any sort of credit tightening or trade down, are you not really seeing a benefit yet and that's potentially to come even though I know it's not included in the guidance?

Speaker 2

Yes, Jason. Certainly, I don't believe that the Q1 results We're benefited by credit tightening. In the prepared remarks, we said and this is really kind of Really recently developing news, but we have started to see the beginnings of what we think is tightening Above us in the stack, we look at it very precisely whether it be by vertical or by region or by Retailer or by actual primary lender, as you know, the secondary lenders, the near prime lenders have been tightening for some time now. We had not seen it happening in the prime lenders. Only in the very last couple of weeks have we seen evidence that it might be happening.

Speaker 2

But there's certainly a delay in what that means for GMV trends or even app trends for us. So it's encouraging because as I've admitted on previous calls, I was expecting it to happen Quarters ago and we saw no evidence of it. The fact that we're starting to see some evidence is kind of a stay tuned comment. And as you said and we said in our Prepared remarks, we have not built anything into the back half or really the full year GMV expectations from a tailwind from that. And so to the extent it continues to play out that way, it could be a tailwind for us.

Speaker 7

Got it. And then over the next few months here, we should start to lap some of the highest gas prices From last year, I was curious, is that a factor that impacts payment rates? I don't know if it's something you're able to see a correlation there in your data. So maybe that could It's actually be a benefit, but I'm just not sure how impactful something like that is for your business.

Speaker 2

Well, I mean, I would Definitely say it's not a negative. It would be a benefit. It's been difficult to parse out with all of the moving parts that have happened During the pandemic, like what is the driver of this or that? Certainly, we know that our customer was more impacted by The inflationary pressures across food, energy and shelter than the prime customer. And to the extent there is an easing there, that's a good thing For us, especially since employment is still strong and there has been some wage gains, that could be That will be a good thing for us.

Speaker 2

It's difficult to tell how much is driven by gas Versus prices of eggs or something like that, but we'll take it and hopefully it continues to show in the portfolio performance And strong gross margin.

Speaker 7

Got it. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Vincent Caintic from Stephens. Mr. Caintic, your line is open.

Speaker 8

Thanks for taking my question. Most of my questions have been asked. But one question on just trying to I parse out consumer demand. Understand that the GMV guidance maybe is kind of weaker through the year, but I'm trying to separate out, how much of that comes from your tight underwriting posture versus consumer demand maybe Picking up, maybe there's more need for the product. So I don't know if there's a metric like application volume or something like that, so we can kind of See how much demand might be moving over time.

Speaker 8

Thank you.

Speaker 2

Yes, Vincent, I would just, I guess, Point you back to our comments about the kind of mid teens decline in GMV that we've seen over the last 3 ish quarters, we believe is about 2 thirds of that is driven by our own decisioning necessary decisioning adjustments. So that would lead you to believe that there is another third of that kind of mid single digits driven by Lower demand for the product that could be offset by Moving further away from the large purchases and the demand pull forward during the pandemic, it could be offset by break fix cycles as things need to be replaced or laptops become obsolete. So we would look forward to those trends, but we do see some continued Soft consumer demand outside of our decisioning adjustments.

Speaker 8

Okay, perfect. That's helpful. That's all I had. Thank you.

Operator

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the I'll turn it back over to management for any closing remarks.

Speaker 2

Thank you. I'd like to thank you again for joining us this morning and for your In Prague Holdings, our team did a great job getting us off to a strong start for the year. We feel good about the positioning of our portfolio And we're making the right investments in people and technology to further our 3 pillar strategy of grow, enhance and expand. We look forward to updating you on our progress next quarter, and we hope you have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.

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Earnings Conference Call
PROG Q1 2023
00:00 / 00:00