Sezzle H1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 5 speakers on the call.

Operator

Thank you for standing by, and welcome to the Sezzle Inc. 2nd Quarter Earnings Conference 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 Yerking, CEO. Please go ahead.

Speaker 1

Thank you. Good morning, everyone. To those joining us from Sezzle's home in the U. S, good evening, and welcome to Sezzle's 2023 Second Quarter Earnings Call. My name is Charlie Joachim.

Speaker 1

I'm the CEO and Executive Chairman of Sezzle. I'm joined today by my Co Founder and President, Paul Paradis Our Chief Financial Officer, Karen Hartchy and our Head of Corp. Dev and IR, Lee Braiding. I'm going to get started with the presentation now, which Before we get into the quarterly results, I would like to touch on our journey as highlighted on Slide 3. In roughly 5 short years, we have built something special here at Sezzle.

Speaker 1

We have handled over $5,000,000,000 in volume, Representing more than 50,000,000 orders and had more than 15,000,000 consumers sign up for SEDL. I think it is a resounding yes That our product helps consumers and improves it in the numbers. While I'm clearly proud of the journey and the benefits we have provided merchants to consumers since our launch, I'm extremely excited to talk about our accomplishments over the last 12 months. We started on our path to profitability in the Q1 of 2022, Which required us to make some tough decisions. Those tough decisions have turned up to be good decisions and have allowed us to drive and expand our product offerings To better serve our merchants and consumers.

Speaker 1

Again, the proof is in the numbers. Our profit margin at the net income line was 5.7% for the last 12 months. While we also grew our top line in double digits, I'm not aware of any other pure play buy now, pay later companies that can say that they have grown The top line in the double digits and then it profitably over the last 12 months. Even more, I don't think any other pure play vinyl payer consider they made a quarterly profit, Much less a profit over the last 12 months. I believe we have done it the right way and so do others.

Speaker 1

We have been recognized for our achievements by CNBC, Forbes, Fortune and The Wall Street Journal, same with you. What does it mean when we say we are doing things The right way. Slide 4 tells the story of our all inclusive stakeholder approach. As you look at the details underlying each of the pillars, Justice, integrity, stewardship and advancement. Notice that within each, our stakeholders, merchants, consumers, shareholders, employees and community Our front and center.

Speaker 1

Assisting people on their financial journey is a great responsibility that we do not take lightly. As the only buy now pay later company that is a certified B Corp, we believe our actions speak louder than words. Giving consumers the opportunity to spread payments out, avoiding interest and building credit, fills an important gap for people that may be facing financial difficulty in their daily lives. Since our inception, we have been committed to driving change to financially empower people on their financial journeys. Turning to Slide 5.

Speaker 1

You can see how we've been driving change with numerous product launches with a goal of becoming an all encompassing payment services platform for consumers. We started simply as a paying for product offering offered at select merchants and have continued to evolve to meet the needs of our users. Adding such offerings that Tesla lock premium anywhere. We recognize that consumers need more than what we currently offer, so we aren't done. We plan to continue to create ways to help consumers on their financial journeys.

Speaker 1

Speaking of expanding to meet the needs of consumers, Our subscription offering highlighted on Slide 6 is clearly meeting the needs of consumers. We now have over 195,000 Since July 1, we've been adding on average over 700 subscribers a day to Premium and Anywhere On a combined basis, if that's not enough to convince you our Net Promoter Score ratings have been off the charts, With Premium and Anywhere receiving consumer NPS scores over 6070, respectively. For some context, an NPS in the 50 to 70 range Means you are amongst the most beloved brands and anything above a 70 is generally considered the Holy Grail of scores. What's good for the consumer is also good for us. Our subscription products experience greater frequency of use compared to our non subscription products, Which leads to higher consumer LCDs.

Speaker 1

Because of the ease of use of Sezzle Anywhere, we're also becoming our users' top of wallet payment method. With more purchase activity, we are seeing the AOV come down, but purchase frequency is more than offsetting the AOV decline. We are also seeing a step up in offline use as the product is used anywhere Visa is accepted. It's exciting to see us truly become an omnichannel option. Now let's get to the reason we are holding this call, to discuss second quarter results.

Speaker 1

Turning to Slide 7. I must admit, life is a lot easier when there is green in the columns versus the alternative. And in Q2, it's green across all our key financial metrics. Total income increased $5,700,000 or 19.4 percent year over year to $34,900,000 This improvement is just a small part of the story. More importantly, we went from a net loss of $15,100,000 in the Q2 of 2022 To a net income of $1,100,000 this quarter.

Speaker 1

We did it through a combination of revenue enhancements, unit economic cost improvements And lowering non transaction related expenses. What this team has accomplished is truly phenomenal. Our adjusted EBITDA margin rose to a positive 18.3% compared to a negative 32.2% in the prior year, And our unit economics or gross margin was a healthy 53.7% compared to only 32.7% in the prior year. And lastly, our nontransaction related operating expenses billed at 54.2 percent of total income Compared to 84.8% in the prior year. Kudos to the team.

Speaker 1

Our engagement scorecard on Slide 8 It's mostly positive. We have been winning the race where it matters, increasing repeat usage, subscription growth, Driving traffic to our marketplace and in the process of diversifying our revenue streams away from being completely reliant on merchant processing fees. The decline in merchant comp might seem concerning, but it is not. Generally, these ultra micro merchants do not drive our business. We implemented some minimum hurdles for merchants to remain on our platform due to the cost of supporting them and thus the senior drop in count.

Speaker 1

Our results show that these merchants were not driving our performance. We have seen some decline in consumer count, But we are encouraged by reconnectivity that will this will start to level off soon. Further, we believe that we have several future initiatives That will put us on the growth path again. I'm now happy to turn the call over to our CFO, Karen Harchie, who will go over the quarterly results in greater detail. Karen?

Speaker 2

Thank you, Charlie, and hello to all. Before we dive in, just a reminder that our second quarter results are Turning to Slide 9. Although we experienced The year over year decline in UMS in 2nd quarter, total income rose 19.4% year over year to 34,900,000 Our top line improvement at 9.1 percent of UMS was driven by the diversification of our revenue stream as 44% of our total income in second quarter was derived from non merchant processing fees compared to only 19.3% in the prior year. We are encouraged by the sequential gain in UMS From 1st to 2nd quarter, a 3.6%, which also reflected a pickup in activity in June relative to April May. For the month of July, UMS was up 4.1% year over year to 147,000,000 Which also represents a 13.5% increase compared to June 2023.

Speaker 2

Without giving too much detail, for the early days of August, we are seeing an additional pickup in UMS relative to July. In fact, 1 of the days in August already represents our best day this year in terms of volume. Yes, we are excited by what we are seeing. On Slide 10, Q2 'twenty three transaction expenses Comprised primarily of payment processing costs, improved 34 basis points year over year to 2.1%. We believe we can further lower our payment processing expenses as we continue to push for consumers to use ACH, We negotiate terms with network partners as our volumes grow and expand products such as Pay in 2 and Pay in Full that reduce our fixed Installment Processing Costs.

Speaker 2

As discussed on our Q1 'twenty three earnings conference call, We anticipated that our provision for credit losses would increase, and that is the case in 2nd quarter as shown on Slide 11. However, the provision remains relatively low despite raising 66 basis points to 1.1% of EOMS in 2nd quarter From 0.5% in 1st quarter, it represents a 76 basis point improvement year over year. We continue to expect that a pursuit of top line growth in 2023 will cause an increase in the provision for credit losses, But we still predict it will outperform last year's provision of 1.7% for the full year. On Slide 12, you can see that Q2 2023 total income less transaction related costs, Which include transaction expense, provision for credit losses and net interest expense rose almost 100% year over year $18,800,000 Our unit economic margin measured against underlying merchant sales And total income of 4.9% and 53.7%, respectively, Position us well to expand our profitability going forward. As shown on Slide 13, it is great to see that we are leveraging our non And action related operating expenses.

Speaker 2

For the quarter, we saw them decline on an absolute basis by 23.7% year over year And decrease as a percentage of total income by over 30 points to 54.2%. Further, all core non transaction related operating expenses, including personnel, third party technology and data and marketing, Declined in the Q2 of 2023 compared to the prior year. In future periods, we anticipate non transaction related operating On Slide 14, 2nd quarter GAAP net income of $1,100,000 draws a strikingly positive comparison To the $15,100,000 net loss in 2nd quarter last year. This now represents the 4th consecutive quarter we've delivered Positive GAAP net income. As Charlie mentioned earlier, we are not aware of any other Pure play buy now pay later company that has done so.

Speaker 2

On an adjusted EBITDA basis, we reported $6,400,000 in the Q2 of 2023 compared with a negative $9,400,000 in the Q2 of 2022. Yes, another example that our initiatives are working. Our capitalization, as shown on Slide 15, We remain stable and healthy. Given our positive operational performance and healthy liquidity position, We are comfortable with our current capital structure. With that, we are now happy to take your questions.

Speaker 2

Operator, will you please open the lines for Q and A?

Operator

Thank you. Your first question comes from Phil Chippendale with Oates. Please go ahead.

Speaker 3

Hi, team. Thanks for your time. First question, just on the bad debts and probably a question for Karen. About 3 months ago, you indicated that they would rise Yes. For the June quarter, I may did.

Speaker 3

Now that you're north of that 1% mark, where should we expect it to go from here? Is this sort of Probably speaking the right level for your business.

Speaker 2

That's a great question, Phil. And while we're not Providing any kind of guidance, what we are saying is last year, our full year was 1.7% And we will be lower than that.

Speaker 3

Okay, great. In terms of the bank partnership, this is something that you guys have Sort of flagged as being on the horizon for a little time now. And maybe this is a question more for Charlie, but when do you think we'll be in a position

Speaker 1

Yes, looking forward to the year, Phil. I mean, it's an important project for us. One of the things we're looking for terms of offerings with the customers, just providing more to them, and the partnership allows us to do that. So it's an exciting one for us and one we're really pushing on right now.

Speaker 3

Last one from me. Just on the active customer numbers. And Charlie, you mentioned that number is down to 2,640,000 now. And you're probably not that far away from getting to a more stabilized position. But again, is that sort of a 3 month sort of outlook where you think it might Sort of flat on and potentially grow from there?

Speaker 1

I think we'll see before the end of the year. I'm going to hand it off to Paul Perreto to sort of give a little more color on that. Paul?

Speaker 4

Yes. Can you hear me, Phil?

Speaker 3

There is a bell.

Speaker 1

You there,

Speaker 4

Bill. So I think the primary causes So that number declining has been, number 1, the off boarding of unprofitable merchants. If you think about our merchants, they're the primary channel through which we acquire customers. We also tightened underwriting a good deal to get our bad debts down. And then an increase in competition has been some factor.

Speaker 4

What we've seen though is that some of the new products that we've launched have been growing really fast, especially premium anywhere. And we also are renewing focus on growth. After focusing on really getting the profitability for the past year, we're growing our sales and marketing teams. Now that we have the best unit economics in DNPL, They'll allow us to be more aggressive with merchant acquisition, and we're already seeing some of those shorter term active user metrics starting to increase again. So as Charlie mentioned, we expect that to flatten, if not, start to go back up by the end of the year.

Speaker 4

But it takes time. We have to acquire more merchants first And that leads to more customers.

Speaker 3

Thanks, Paul. Appreciate it. Thanks for color. That's all for now.

Operator

Thank you. Your next question comes from Elyse Kennedy with Jarden. Please go ahead.

Speaker 2

Hi, there. I just got 2 quick questions.

Operator

First of

Speaker 2

all, I just wanted to ask, you mentioned there were some initiatives just around growing consumers and merchants. Are you willing to share any insights as to is that new products? Is there something else in the pipeline that we can think about?

Speaker 1

Well, the existing products, the ones we recently launched, Premium was launched about 12 months ago, has been a great success. Anywhere just recently launched another great success. Up has been in the mix for quite some time. It's a great engagement tool with consumers, a great differentiator for us. Both continue to be great products in terms of keeping our consumers active.

Speaker 1

Keeping consumers active is how it did more than half the battle Of creating a great company in Financial Services. The other half, I think Paul covered with the questions with Bill. Basically, as we're our unit economics are getting stronger and stronger and strongest in the industry, it allows us to be more aggressive with our merchant acquisition. And so I think in combination with the great product offerings that we have, the great unit economics that we've got and the push towards getting back on the growth machine, I think all of those combined is our view as why we're going to be turning that around.

Operator

Thanks. And I just wanted to

Speaker 2

I'll give back the record August that you've mentioned that you've had. Can you know what's at play there? How much is a function of What Sensus doing as opposed to the economic backdrop? Or is it a combination of both?

Speaker 1

I would say it's 90% Sezzle, 10%. At least in many ways, I think, even though we're a larger A startup that's signed by a lot of means, and we're a decent sized company. We're still not a company that's really driven primarily by The economy, it's really our initiatives and our actions that drive the results one way or the other. And so I'd say what we're already seeing is that growth is coming from our initiatives and premium and anywhere being a big part of it.

Operator

Great. Thanks for your time. Thank Thank you. We are showing no further questions at this time. I'll now hand back to Mr.

Operator

Joaquin for closing remarks.

Speaker 1

Thank you. In closing, I'd like to send another shout out to the Sezzle team. They've really stepped up to make Sezzle a great success. We're continuing to work diligently on launching additional product offerings, while we continue to grow and improve our existing offerings. So it's all around, it's been A great year and a great 6 months here in 2023.

Speaker 1

And one thing to note, we're actually holding a Board meeting And for your interest in Sezzle. We will talk next when we report our Q3 results in November. But one note before we go, our 10 Q will be filed with Sweet. On August 15, in case some of the listeners are wondering. Have a great rest of your day, and thank you.

Operator

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

Powered by Quartr
Earnings Conference Call
Sezzle H1 2023
00:00 / 00:00