Sezzle Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2023

There are 5 speakers on the call.

Operator

Thank you for standing by, and welcome to the Sezzle Inc. 1st Quarter 2023 Results Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr.

Operator

Charlie Uekim, Chairman and CEO. Please go ahead.

Speaker 1

Good morning, everyone, or to those joining us from our home here in the U. S, good evening, and welcome to the Sezzle Inc. 20 My name is Charlie Ueke. I'm the CEO and Executive Chairman of Sezzle, and I will be leading the presentation today. I'm joined by the call by our CFO, Karen Archie our President, Paul Paradis and our Head of Corp.

Speaker 1

Dev and IRB Ratings. In the Q1, we started the year out as planned by continuing to improve these profitability drivers, such as increasing total income as a percentage of UMS And decreasing operating expenses as a percentage of total income. Of course, these numbers don't always improve month to month or quarter to quarter. If you look at the trend lines, you can see what we're focused on and what we're executing on. The company continues to put a priority on profitability.

Speaker 1

We're still in a period of economic uncertainty, which has us prioritizing profit overgrowth. That being said, we are getting more aggressive again. Back in 2022, we analyzed initiatives in an almost miserly fashion, looking for immediate ROI. In 2023, we've let the team know that we can extend ROI timelines and begin making more investments for the future. This mindset should lead to more growth and better profit outcomes for future quarters and future years.

Speaker 1

I'm proud of what our team has accomplished in the Q1 with a profitable GAAP quarter and our best quarter ever on an adjusted EBITDA basis. I think our investors should consider that statement as they value us. We just had our best quarter on an adjusted EBITDA basis, And it wasn't a quarter that is not a strong one for our sector. We have more initiatives in the works. We've been busy We're excited to tell you more.

Speaker 1

I'll jump into the presentation now and tell you all about it. If you'd like to follow along, you can find the presentation posted on the ASX website. Let's get started. Keep in mind that all dollar amounts here are in U. S.

Speaker 1

On Slide 3, you can see key products that are driving results we're seeing today, premium and up. When I explain Sezzle today, I'd like to focus on the key pillars Our core product is still our PM4 PMPL products, no doubt about it. That product has changed the lives of millions of consumers and thousands of merchants. Our core product remains the e pillar product. But As we continue to get to know the consumer, we're starting to understand themes around what's important to them.

Speaker 1

The first is financial empowerment, and that's where Up shines. We're helping consumers with their financial features as a side product of what we're doing. We knew we had a good idea at the start of launching up, we could steal it. But today, we have an update to measure it and the result is impactful. For the average UP member, we're raising their credit score by 2020 in the 1st 4 months.

Speaker 1

That's regardless of the agent status with us. So you can imagine many consumers that use the product properly are doing even better than that. We plan to continue to create ways to help the consumer on their financial journey. 2nd, we know consumers want more access with our managed system. This is where Premium comes in.

Speaker 1

With Premium, we give consumers access to premier retail brands, and they love us for it. We want to continue increasing access for consumers, which is where our Anywhere card comes into play. We expect anywhere to come yet another product from Sezzle that should create financial tailwind to break up and premium have already. It's because we're giving them what they want. And you can see that played out on Slide 4 with our consumer reviews.

Speaker 1

We monitor these consumer We have launched a number of new products since early 2022, and the worst thing that can happen is disappointing or disenfranchising our existing customers With those new products, especially the ones who already loved us. But as shown here, we continue to excel at giving consumers what they want Even after our new product launches, we have great reviews across all the ecosystems we operate in. We're scoring well because we're building the products that our If you look back to Slide 5, we start to get into the numbers, and we definitely see some dramatically better numbers here. It really shows what a year of consistent execution in the right direction can do. Total income, up Over 25% year on year to just shy of $35,000,000 for the quarter.

Speaker 1

GAAP net income, you can't even put We went from losing $28,000,000 to making $1,700,000 in the quarter. Our human economics, what a great result here. We changed from a slim margin to a large one, moving from 0 point 8% net transaction margin to a 5.8% net transaction margin, all as a percentage of payment volumes through our systems. The next step shows a bit of the picture of how we got there. We added income from other sources.

Speaker 1

Partnership processing fees are down as a And finally, we're doing all this Great work with a small, early year team. Our decision in 2022 is to focus on North America is still paying dividends. On Slides 7 and 8, we wanted to show you all our first quarter results across a number of performance metrics over a 3 year period. There are a few items to talk about here. The most important, in my opinion, is what's going on with our unit economics and our efficiency.

Speaker 1

We turned $34,700,000 in total income into $21,400,000 of gross profit. That's a fantastic conversion percentage With 62 percent of top line converting into our gross profit, this is why I keep talking about operational leverage. With that level of efficiency, we have the potential to put up some large net income numbers by focusing on top line growth, While keeping our team size relatively flat. As we get into the second half of the year, I think we'll start to demonstrate the strength of that leverage. The only metrics to drop in our scorecard are our active consumer and active merchant numbers on Slide 8.

Speaker 1

We are losing micro merchants And it turns to max consumers as we make the trade off from growth to profitability. One key driver of that was our implementation of emergency. The merchant does not hit a minimum monthly cost of volume. We lost micro merchants that were not willing to pay that fee. The more good news in the numbers here are around engagement.

Speaker 1

We continue to drive repeat usage higher, and we also continue to create More of the volume out of our own ecosystem, with marketplace volumes rising to 29.5 percent of total volume. This shift is great for the company because our importance to merchants continues to rise as we drive more and more volume directly to them. All in all, we're very pleased with the results in this quarter. I'll now hand the presentation over to Karen Archie, who will walk through some of the financial details.

Speaker 2

Thanks, Charlie, and hello to all. Before we dive in, just a reminder that our first Quarter results are unaudited and presented in U. S. Dollars. Starting with Slide 9, in the bottom chart, You can see that Q1 'twenty three UMS totaled $369,800,000 down from $450,500,000 in first Quarter 2022.

Speaker 2

The year over year decrease reflects the 2022 strategic initiatives, including credit risk improvements related to the profit machine learning model as well as renegotiating with and or off boarding unprofitable merchants. While underlying merchant sales declined, Q1 2023 total income increased by 25.5 percent to $34,700,000 from $27,600,000 in the Q1 2022. On a quarterly basis, total income as a percentage of UMS increased to 9.4% in Q1 'twenty three, representing a record high compared with 8.5% last quarter and 6.1% in the same quarter last year. Consumer engagement remains strong as repeat usage increased to 94.4% in Q1 'twenty three, up 188 basis points from the same quarter a year ago. On Slide 10, you can see that Q1 'twenty three transaction Thanks, totaled $8,200,000 or 2.2 percent of UMS compared with $11,800,000 or 2.6 percent of UMS in Q1 2022.

Speaker 2

Transaction expenses comprised primarily of payment processing costs And these costs as a percent of UMS decreased because of our payment strategies to incent customers to choose ACH is their primary payment option. Additionally, we are seeing the benefit of favorable renegotiated terms with network partners as well as the benefit of pay in full as a payment option for consumers at the point of sale. On Slide 11, you'll see the 1st quarter provision for credit losses totaled 1,700,000 or 0.5 percent of UMS. In addition to continuous improvement in underwriting driven by the Profit machine learning models receivables originated in 2022 performed better than expected, Resulting is a benefit recognized during Q1 'twenty three. We expect that our pursuit of top line growth in 2023 will cause an increase in the provision for credit losses, and we plan to manage this marginal uptick through the profit model.

Speaker 2

On Slide 12, you can see quarterly total income less transaction related costs that include transaction expense, Provision for credit losses and net interest expense reached a new record high of $21,400,000 in Q1 'twenty three, 5.6x to $3,800,000 from Q1 2022. Similarly, our unit economic margin measured against either UMS or total income represented new quarterly highs of 5.8% and 61.6%, respectively. The positive performance was driven by revenue and cost initiatives implemented in 2022, most significantly the launch of Sezzle Premium and improved consumer underwriting. With stronger unit Economics, we are better positioned as we pursue growth opportunities this year. On Slide 2013, While income less transaction related costs improved year over year, so did non transaction related operating expenses.

Speaker 2

1st quarter 'twenty three non transaction related operating expenses decreased by 38.7 percent to $19,300,000 over the same period last year with improvements across the board from third party tech and data to marketing to personnel. As a percentage of total income, the ratio was more than cut in half from 114% in Q1 'twenty two to 55.7% in Q1 'twenty three. Last year, dollars 4,400,000 of professional fees associated with the proposed and ultimately terminated ZIP merger were recognized in the Q1. As we pursue growth opportunities and implement our next round of initiatives, we expect non transaction related operating expenses to increase modestly. On Slide 14, 4th quarter GAAP net income was $1,700,000 During a striking comparison to the $28,000,000 net loss in Q1 'twenty two, this is the 3rd consecutive quarter that we have delivered positive GAAP net income.

Speaker 2

On an adjusted EBITDA basis, a non GAAP measure, we reported $8,300,000 for first Quarter 'twenty three compared with negative $17,800,000 in Q1 'twenty two and positive $7,000,000 last quarter. You see the trend moving from negative to positive, driven by our key 2022 initiatives, including enhanced underwriting and the growth of our Quarter 'twenty three, we had total cash of $60,600,000 comprised of $59,000,000 in unrestricted cash and $1,500,000 in restricted cash. The Q1 'twenty three reduction in total cash from year end was driven by the pay down on our line of credit and decrease in merchant accounts payable. We had $59,800,000 drawn on our line of credit as of March 31, 2023, compared with $65,000,000 at year end. At March 31, we had 80 $4,800,000 in net notes receivables and $65,300,000 in merchant accounts payable, of which $51,300,000 was attributable to the merchant interest program.

Speaker 2

Given our Positive operational performance and healthy liquidity position, we are comfortable with our current capital structure. Now I will pass it back to Charlie to close out the presentation.

Speaker 1

Thanks, Eric. The last part of the presentation is just a quick update on April and our initiatives. First, April, If you can, please take a look at Slide 17 for that result. For April, total income and net income numbers were relatively subdued As volumes were slightly down from March. And unfortunately, the operational leverage sensitivity works both ways.

Speaker 1

If volumes drop, we lose strong rates on gross profit and our OpEx stayed flat. We basically had a breakeven net income, But our adjusted EBITDA still comped quite strong at $2,100,000 That $2,100,000 removes stock comp and interest expense for those out there. The part of the result that does stand out this year is the year on year look at the numbers. We're significantly better at running this business year on year when we compare the results to last year. We also continue to attract more users into Premium, which stands at 155,000 Premium is now a major part of our business less than a year since launch.

Speaker 1

On Slide 18, we wanted to remind you that So we have plans to add to the bottom line as we work our way through the remaining months in 2023. We believe that our initiatives will add an Additional $10,000,000 net income on an annualized basis through 3 key drivers. First, the launch of an Anymore kart, formerly the Flex kart. By giving our customers more access to use our systems where they want to use this, we believe that our revenue, income and engagement numbers will continue to grow. 2nd, through further monetization of our marketplace now, we continue to increase engagement in the app and we're doing it in a win win sort of way.

Speaker 1

We keep on adding merchant deals and discounts and attractive affiliate relationships to that ecosystem that lead to happier customers and additional income. Finally, through a bank partnership that will unlock more income and open up even more product launches for the company in the second half of the year. We'll have more details added in a full, but for now, we're leaving it vague on purpose for competitive reasons. On Page 19, we want to give a quick update on the corporate exchange side of the house. The first is the 4 U.

Speaker 1

S. Removal. This move will allow U. S. Citizens to buy a Sezzle share from the ASX, which will allow for more demand from our home market where our product is present.

Speaker 1

Next is our NASDAQ listing, which also ties to the reverse stock split. Due to NASDAQ listing rules, We have had a stock price above $4 less to lift the NASDAQ. Based on our own research and We have equity capital market debt for the United States. We targeted a post split price in the double digits. Thus, we decided on a 38:one reverse stock split.

Speaker 1

We've also made good progress with the SEC and NASDAQ before this year, so we think we can go live with NASDAQ before the end of the quarter. We're definitely excited about that. Now many companies get to ring a bell on an exchange, and now we get to do it twice. Well, that's all for the quarterly update. We hope you enjoy the monthly update.

Speaker 1

We love the cadence and plan to continue doing for the foreseeable

Operator

Your first question comes from Phil Chippendale from Ordinance. Please go ahead.

Speaker 3

Hi, Charlie and team. Thanks for your time. First question, just looking at Slide 18. And these FY 'twenty three initiatives that you've outlined. I'd just like to unpack a couple of those.

Speaker 3

Firstly, just on the Anywhere card, Can you just run through the revenue model here, please?

Speaker 4

Yes. Good to hear from you, Phil. The first thing, basically, the Anywhere card, it's a card that will be a subscription model, the initial launch of it. It will be a slightly higher price points than premium. And what that will allow the customer to do is basically tap the car that's present

Speaker 1

in their mobile app Anywhere they

Speaker 4

want to use it. So the revenue model consists of subscription

Speaker 1

as well as interchange revenue. Those are the core drivers of the initial launch of our products.

Speaker 3

Okay, great. Just turning to the bank partnership. You And like you remain tight on the details there, but perhaps you could talk to us or just give us a sense of How far advanced those discussions are? It sounds like you've identified at least one party that you're potentially talking to and that this is a reasonably developed Discussion so far?

Speaker 1

Yes. We definitely have progress with the relationship. We're not talking about plans. There are final plans, but they're underway. I don't know if I

Speaker 4

can give any more details about how far along, but we

Speaker 1

do expect to be a big part of the drivers Of that $10,000,000 in net income.

Speaker 4

So we're going to be to get that done, we're going to have

Speaker 1

to complete that in the near term So that's to have additional impact on the second half.

Speaker 3

Okay. And I suppose just in terms of that breakdown in Contribution to the $10,000,000 across the 3 different categories that you've identified. I mean, you just made a comment there that the partnership would be a significant A component of that $10,000,000 should we think of it as being either roughly a third, a third, a third or perhaps you could George, to weigh what much demand of value is going to be recognized, Keith?

Speaker 1

I think probably more towards the Anywhere Card and Bank partnership Where the weightings are? It's probably not a third, a third, a third. I'd say the top and bottom items are probably the bigger drivers. But Again, these are products that are not necessarily launched. Is there even more of

Speaker 4

an estimate at this point?

Speaker 3

Okay. Just touching on Slide 11 and the credit losses, this might be a question more for Karen. The Q1 'twenty three Figure of 0.5 percent was an extremely low number. And you indicated in your discussion earlier that you'd expect that to rise Over the balance of calendar 'twenty three, have you got a range in mind where you think your business is sort of optimally placed to pursue some revenue growth Whilst keeping those bad debts under control?

Speaker 4

Jen, do you want to take that?

Speaker 2

Sure. And without putting a forecast out there, I would say that we expect the Provision for credit losses to come in better than what we saw last year, and I think we ended the year around 1.8%.

Speaker 3

Okay, great. Thanks. And Karen, maybe while you've got the floor again, and this is the last question from me, It's just looking at the non transaction related operating expenses under the last chart on Slide 13. We saw a slight uptick Into the Q1 of 'twenty three to $19,300,000 Is it fair to assume do you think that you're perhaps past the low point in that OpEx?

Speaker 2

So I don't that could be a fair assumption. I would also say that in 1st Quarter of 'twenty three, we or in the Q1, we always have higher professional services expenses because of our annual audit. So it's kind of the seasonality of the Q1 and We are adding a few staff positions.

Speaker 1

Okay. Thank you. So just a little more color.

Speaker 4

A little further color on that one. I think I can't say it could bounce around a bit, but our goal is

Speaker 1

to keep relatively flat this year.

Speaker 4

If we start to have better than expected results, then we'll start to hit on the gas a little bit

Speaker 1

more, which means growing the team size, but

Speaker 4

I would still say relatively flat.

Speaker 3

Okay. Thanks, guys. That's all from me.

Operator

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

Speaker 4

Thank you. In closing, I just want to send out another shout out to the Sezzle team. They continue to do a great job in executing our plans and the results I'm excited to see where we end the year. We've got some lofty ambitions, but I think we've also got a team to match. Thank you and have a great day.

Operator

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

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Sezzle Q1 2023
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