FlexShopper Q4 2023 Earnings Call Transcript

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April 2, 2024

There are 6 speakers on the call.

Operator

Greetings. Welcome to the FlexShopper 4th Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to Carlos Sanchez, Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, and good morning. Welcome to FlexShopper's 4th quarter 2023 financial results conference call. With me today are Russ Heiser, our Chief Executive Officer and John Davis, our Chief Operating Officer. We issued earnings release yesterday, which we'll be referencing during today's call. Our earnings release and SEC filings can be found on our Investor Relations section of our website.

Speaker 1

We will be available for Q and A following today's prepared remarks. Before we begin, I would like to remind everyone that this call will contain forward looking statements regarding future events and our financial performance, including statements regarding our market opportunity, the impact of our growth initiatives and future financial performance. These should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC reports, including our Annual Report 10 ks for the year ending December 31, 2023. These statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause them to actual results to differ materially from those statements. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise.

Speaker 1

During today's discussion of our financial performance, we will provide certain financial information that contains non GAAP financial measures under SEC rules. These include measures such as EBITDA, net income and adjusted net income. These non GAAP financial measures should not be considered replacements and should be read together with our GAAP results. Reconciliation to these GAAP measurements and certain additional information are also included in today's earnings release, which is also available on the Investors section of our website. This call is being recorded and a webcast will be available for replay on our Investor Relations section of our website.

Speaker 1

I will now turn the call over to our CEO, Russ Heiser.

Speaker 2

Thank you, Carlos, and thanks to everyone joining us this morning. We're excited to discuss our Q4 performance and provide some insights into the Q1 of 2024. Overall, the Q4 continued the financial progress from prior periods. Comparing the Q4 of 2023 versus the Q4 of the prior year, total fundings were up 7%, net lease and loan revenues were up 42%, gross profit was up over 300% and operating income was a positive 5,600,000 compared with the operating income loss of 5,500,000. Dollars And then moving on to 2023 full year results, see a similar pattern.

Speaker 2

Total fundings were up 8% versus the prior year. Net lease and loan revenues were up 3%, gross profit was up 47% and operating income was a positive $13,700,000 compared with an operating income loss of $6,300,000 in 2022. Despite all these financial improvements, the hallmark of the 4th quarter with the work going on behind the scenes, as we mentioned on the last call, we are continuing to transition our flexshopper.com business significantly. What was traditionally an online lead generator for lease to own transactions is now transitioning into a retail platform with other payment options for consumers in addition to FlexShopper's lease to own product. In the Q1 of 2024, there will be a new line on our income statement reflecting revenue from goods sold on flexhopper.com that were not funded by us.

Speaker 2

Since February, we have been selling merchandise on our sites that was funded via a payment option that was not a FlexShopper lease. Average margin on the products was approximately 23%. More importantly, this means that we are making more wholesale profit per day on flexshopper.com than we're spending on daily marketing. Our next steps are fourfold. First, we will continue to add additional payment options to flexshopper.com so that almost every visitor can find a payment option that fits their credit profile.

Speaker 2

Whether it is a prime consumer looking for a 12 month deferred interest offering or a near prime customer looking for pricing lower than our traditional lease to own product. As we have mentioned previously on these calls, we were monetizing less than 1% of the unique visitors to our site. More payment options let's just monetize the visitors that are already coming to flexhopper.com. 2nd, we will continue expanding the number of SKUs on our site, provide our customers with a wider range of goods, both from a price perspective and from a product selection perspective. We want to continue to follow a no inventory drop ship model.

Speaker 2

Therefore, our merchandising team is adding manufacturer, distributor and shipping partners that broaden our reach into the higher margin appliance furniture and specialty goods markets to complement our traditionally strong electronics presence. 3rd, given that the margins on goods sold via other payment options are leased from FlexShopper per day is greater than our daily marketing spend, we are continually but prudently and cost effectively increasing our marketing spend. This will allow us to grow not only the amount of goods sold on the site, but also the amount of goods leased from us on the site. As I mentioned, this venture only launched in mid February, but we are excited about the runway in front of us. Finally, we launched the first of what we expect will be numerous micro sites in early March, focused on individual product verticals that will expand our reach and efficiently adding new traffic to the FlexShopper ecosystem.

Speaker 2

Using generative AI, the goal is to quickly expand beyond the legacyflexhopper.com marketplace experience to create streamlined sites for expediting item purchases and lease fulfillments. Our first was focused on gaming computers and consoles as that is a core competency. The micro sites launched this year will range from jewelry to furniture and over time represent all of the primary verticals for leasable goods. Moving past the digital marketplace, FlexShopper continues to roll out the lease offering into new locations. Since the end of 2023, we have expanded into an additional 7 20 units through today with additional 580 more planned through the middle of May.

Speaker 2

And of course, further opportunity lies in improving the in store leasing process with our current retailer partners. With another long term partner, we're exploring how we can originate more leases together and are piloting an improved leasing and checkout process in a subset of locations that's currently sustaining an over 200% improvement in lease through rates. After a bit more refinement and testing, we plan on rolling out the improved process into approximately 1600 stores by the end of this summer. Finally, before I hand off the call to our CRO, I want to mention the recent positive support from our lender. Last Wednesday, we closed on a new credit facility that increased the funding commitment from $110,000,000 to $150,000,000 pushed the maturity date to April 2027 and decreased our interest costs by 2% per year.

Speaker 2

I'll now hand the call over to John Davis to dive into the company's 4th quarter performance.

Speaker 3

Thanks Russ. As we have discussed in previous quarters, we have been focused on improving asset quality, rolling out our retail margin strategy on our FlexShoter shopper.com marketplace and to grow the business. I'm pleased on our progress on all these fronts. FlexShopper adjusted EBITDA was $23,200,000 for 2023 versus minus $536,000 in 2022, which was almost a $24,000,000 year over year improvement. For Q4 of 2023, adjusted EBITDA was $8,200,000 versus a minus $4,000,000 last year.

Speaker 3

Helping to drive this improvement in financial performance is our continued efforts on rolling out our retail revenue strategy and our focus on asset quality improvement over the year. Our merchandising team has been working on new relationships with wholesalers, distributors and manufacturers over the past year to increase the number of products on offer in our online marketplace with higher retail margins. This margin, when originated through Reflec Shopper lease agreement, is recognized over the life of the lease. Resulting financial benefit shows up on our P and L via cost of merchandise sold. The cost of merchandise sold as a percentage of lease revenue is 42.8% for full year 2023 versus 47% in 2022 and 39.9% in Q4 of 2023 versus 44.7 percent in Q4 of 2022.

Speaker 3

This was a $3,000,000 benefit in Q4 of this year versus last year. As Russ was mentioning earlier, in Q1 of 2024, we launched a new initiative to offer alternative partner payment solution options on flexhopper.com to broaden our reach to a wider set of customers both above and below our current credit segment served by the FlexShopper lease. With our expanding retail margin on products offered online, any additional sales from existing website traffic are immediately accretive. A large percentage of our current website traffic does not convert today

Speaker 2

due to

Speaker 3

the client applicants or non spenders looking for a better deal. By offering a broader range of payment solutions, we expect to increase website sales, which will result in higher retail margin that is immediately recognized and received. For the 1st 2 months that we have been offering other payment options, we have sold an additional approximately $750,000 on our marketplace with a markup of over 20% on cost of goods sold. There is significant opportunity to expand into higher product price ranges and new product categories as well as the opportunity to reinvest this retail margin into additional marketing to drive more traffic to our website, which will also have a halo effect on lease originations. As we continue to look to improve conversion, we are increasing the investment into generative AI content creation, targeted response models that will identify the most relevant product and payment solutions for a customer in a wider selection of products that have a broader appeal to our potential customers.

Speaker 3

In regards to our efforts on asset quality, we have made significant strides on underwriting and front improvements over 2023. Full year lease bad debt as a percentage of lease revenue was 32.2 percent for 20 23 versus 37.1 percent in 2022. For Q4 2023, this was 30.9% versus 40.2% in Q4 of last year. This was a $4,400,000 benefit in Q4 this year versus last year, which is a 30% year over year reduction in bad debt. Numerous new strategies have been deployed over the course of 2023 and this work is ongoing.

Speaker 3

Coming out of higher price inflation in 2022, we tightened our underwriting policy to control asset quality, which resulted in lower lease originations. However, I am pleased to report that Q4 lease originations increased year over year for the first time since Q2 of 2022, while keeping conservative underwriting standards in place. Lease revenue is spread out for up to 12 months over the life of the lease. So there will be a lagged effect on lease revenue from these larger origination levels. Our risk and fraud modeling continues to evolve and improve with the use of online search and navigation patterns, part contents and continuous testing of 3rd party data sources, which are all combined into new machine learning driven models and strategies which identify riskier customers on a real time basis.

Speaker 3

Our partnership point of sale lease channel also continues to experience growth. We have launched a new strategic partner in the tire space in Q1 of 2024, which is expected to significantly increase the storefront count offering FlexShopper payment solutions. And we continue to expand within our existing partner networks as they expand their various footprints. As of December 31, 2023, we saw 51% year over year increase in storefronts and our current rollout pipeline suggests an estimated growth of an additional approximately 50% this year. We're also expecting growth from other retailer websites that offer FlexShopper leases via credit waterfall partnerships.

Speaker 3

Our goal is to provide a platform of sustainable and profitable growth. We have heavily invested in a strong leadership team, a robust technology stack making the use of latest tools available to the marketplace and the continuous focus and investment on asset quality in fraud prevention. I am pleased with what FlexShopper accomplished in 2023. We are poised to continue this momentum in 2024. I would like to also thank our team members who have worked very hard over the past year to achieve these results.

Speaker 3

With that, let me turn the call back to the operator for Q and A.

Operator

Thank you. We will now be conducting a question and answer Our first questions come from the line of Scott Buck with H. C. Wainwright. Please proceed with your questions.

Speaker 4

Hi, good morning guys. Thanks for taking my questions. Russ, I

Operator

was hoping we could just kind

Speaker 4

of get an update on the state of the consumer and maybe any shifts you're seeing in demand or payment trends that are worth pointing out?

Speaker 2

Sure. So as we've mentioned in the past, Scott, there tends to be some seasonal changes that always occur as we come into this tax refund season. We always see the lighter demand at the beginning of the year. A part of what we have done by moving to the additional payment options on our site is try to find a way to make sure we in any way we can try to guarantee that asset level performance. So part of the payment options that we have on our site is we also have a number of providers below us and that are essentially monetizing our declines.

Speaker 2

So what we've tried to do is really just lock in on a particular asset level return that we want to hit and then let as opposed to try to monetize every visitor of the site that is interested in lease to own have some of those visitors that may not necessarily fit our criteria flow down to others. So generally across the board, we've essentially been tightening, but not so much in response to what we've seen from a consumer perspective, but more based upon what we want to achieve from an asset level perspective.

Speaker 4

Great. That's helpful. On the other payment options on the site, I'm curious, are you adding items that would not typically be leasable that people can now pay for outright? Or are we not seeing, I guess, that kind of shift in inventory?

Speaker 2

No, we're not seeing that type of shift yet. That might be something we look at down the road. Given that FlexShopper historically has had a $3,000 spending limit cap, what we're really focused on now is bringing in goods that furniture goods, home goods, etcetera, that extend beyond that $3,000 cap to really line up with other payment options. Like there's a lot to fill in from that perspective first, especially given the dynamics of drop shipping and especially when it comes to large parcel or LTL shipping for some of these item types. Once we've sorted through some of these other pieces, I think there is a opportunity to move into some of those other goods that aren't traditionally leasable.

Speaker 2

I think complementary warranties and other things that can be layered on top that aren't traditionally leasable. I think there's a lot more room to grow, but we're just starting with the different sectors we walked through and higher priced items than what we've traditionally had.

Speaker 4

Great. That's helpful. And then last one for me. Can you remind us what the typical lag is between opening up a new storefront location versus when you actually start to see some meaningful revenue contribution?

Speaker 2

Sure. So the dynamic first starts with whether that location has had any type of financing or non prime financing in it before. To the extent they're a little bit more experienced, it speeds up the process. This most recent rollout that's taking place, we're replacing another non prime product. So it's a little bit easier adoption plan.

Speaker 2

There's always the training and different online incentive portals that are necessary to get the retailer up to speed. But given that this latest rollout has had subprime financing in the past, I expect 3 or 4 months and we will be close to max originations out of those stores. And of course, we have the lease to own lag that takes a while to recognize revenue. But from originations perspective, we should get there. Certainly, by the end of this summer, we should be full steam on this most recent rollout.

Speaker 4

Great. I appreciate the added color and congrats again on the results.

Speaker 2

Thanks, Scott. Thank you.

Operator

Thank you. There are no further questions sorry. Our next question comes from the line of Michael Diana with Maxim Group. Please proceed with your questions.

Speaker 5

Okay. Thank you. Russ, could you go over you mentioned on your retail strategy, 720, another 580, eventually 1600. Could what exactly do those numbers refer to? What is the strategy in those?

Speaker 2

Sure. So in terms of the store count, so since the end of 2023, we've rolled out into additional 7 20 store locations. And these are locations where we're the exclusive lease to own provider and they're in the automotive segment, goods and services segment. We've done 720 through today. There's another almost 600 to 580 that will continue to roll out in those locations.

Speaker 5

Okay. And the 1600 is I think you said improved pricing or something?

Speaker 2

We already have a partner that has about 1600 locations. This is where we're working together with them to find a new improved process to increase the lease throughput. We're running a pilot with them in the Tampa market at the moment in a number of locations there. And the lease throughput is up a little more than double what we experienced previously. So this is just an easier consumer experience tied in closer to the point of sale systems, etcetera.

Speaker 2

So we're excited to continue to work and refine the technology there and then eventually essentially reroll out into those that partner 1600 stores. Hopefully, achieving the same results we have in the pilot, which is a doubling of originations. Okay.

Speaker 5

And then when like year end 2024, as far as relative contribution goes between your flexchokbird.com website, the retail, what would be the order of contribution among those strategies would you think?

Speaker 2

Sure. So given what we're seeing on the online site and the ability to increase marketing spend because we have this high margin on goods and we've added these other payment providers, we expect marketing spend in that channel, which is offset by the wholesale margin, but we expect that to more than double by the end of the year on a cumulative basis. To the same extent, we feel like, we'll call it the non marketplace, the retailer model, given this extra store rollout, given some of these new initiatives, we'll probably see similar impacts. Obviously, the repeat market dynamics are a little bit different. So from a new customer perspective, I expect it to be new FlexShopper customer perspective, I expect it to be about 45% online and 55% retail.

Speaker 2

From a total customer perspective, as we mentioned before, the retailer customer doesn't repeat quite as much. We expect to be more 2 thirds online, 1 third retailer.

Speaker 5

Okay, great. That's very helpful. Thanks a lot.

Speaker 2

Thanks, Michael.

Operator

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Russ Heiser for closing remarks.

Speaker 2

We appreciate everyone dialing in this morning. I want to thank the team here at FlexShopper for all their hard work over the past quarter, the results generated, and we look forward to another great quarter.

Operator

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your

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