Sezzle Inc

ASX:SZL

Earnings Call Transcript 2020-Q1

[Operator]

Thank you for standing by, and welcome to the Sezzle Q1 business update. [Operator Instructions]I would now like to hand this conference over to Mr. Charlie Youakim, CEO. Please go ahead.

[Charles G. Youakim, Co]

Thank you, and welcome to Sezzle's first quarter 2020 business update. This is Charlie Youakim, and I'm joined by Paul Paradis, our Chief Revenue Officer; Karen Hartje, our CFO; and Lee Brading, our Head of IR.Before we begin, I wanted to express our gratitude on behalf of the entire team here at Sezzle to all of those on the frontline of this COVID pandemic, to our doctors and nurses, who are putting their lives at risk to help protect us, to the warehouse workers, and those in the e-commerce space and in shipping. Those people are really keeping our economy afloat during this time period, and we can't thank them enough. We'd also like to tip our hats to those government reps who are also working tirelessly to make sure our communities are supported. We appreciate all the work that you're doing for us in the community, and we can't thank you enough.On our agenda today, we're going to cover a number of topics. First, we're going to talk about our response to COVID-19 and also give you a sense of the consumer during this pandemic, and what they're purchasing. We're going to touch on our recent results and give you a sense of our strong balance sheet and liquidity and go into a bit more detail on the U.S. government stimulus and financial relief, especially with regard to the CARES Act. And then finally, we're going to talk about our positive leading loss indicators.Please flip ahead to Slide 4 where we'll discuss our response to COVID-19. Our response started with our employees. In early March, we implemented a mandatory work-from-home policy and suspended all business travel in an effort to help with the cause and to protect our team from their exposure to COVID-19. We also implemented all necessary systems to support a fully remote team, and that was not much of a stretch for us as a company because we are already highly digital. All of our team members, for instance, have laptops, which made it very easy for many of our team members to move from a workplace environment to a work-from-home environment and still perform at a high level. And then finally, we implemented unlimited sick time for anyone experiencing COVID-19 symptoms. We also increased our communication with our team and make sure that they're up to speed with what was going on. Typically, we would hold monthly town halls. And those updates that we would cover in those town halls were increased during this time period. The results for us was a record-high employee Net Promoter Score, and that was really great to see our team is feeling highly confident during this time period and operating at a high level.For our consumers, we expanded our fee forgiveness programs. We now allow shoppers up to 2 free reschedules per order, whereas before COVID-19, we only allowed 1. If a customer calls into our support centers, we'll also push beyond those fee forgiveness programs and some hardship requests. Our viewpoint is that this is an unprecedented time, and it needs unprecedented support for our shoppers. As you can see, the results show that our consumers are happy. If you take a look across all of our public review sites, you'll see an extremely positive response for many of the programs that we're working with at this time.And finally, for our retail partners, we are also increasing our support and communication, but we're also asking them to step up as well. We're asking for our partners to operate at a high level. And if they're not able to operate at a high level, in some cases, we're ceasing to partner with retailers in those unfortunate circumstances. But our viewpoint is that we need to all operate at a high level in the business world during this time period to do the best possible job for consumers out there. Our actions with our retail partners have led to great results. We've seen accelerating merchant sign-ups and improving NPS scores from that group.On Slide 5, we thought it would be helpful to show some data from North America from our processing partner. This data shows the change in spend over the COVID time period from March 3 to April 10 across a number of categories, including online where Sezzle resides. As you can see, online is one of the last bastions for positive results, and we feel quite lucky to be in the e-Comm sector at this time period.If you look at Sezzle's COVID-19 snapshot, again, we're well positioned because of our situation in e-Comm. We're up 316% year-over-year for the same time period. So you can see that, that's not really slowing us down. And over 80% of our categories are exhibiting positive growth during this COVID-19 period. We've highlighted a couple of the sectors that are doing well and a couple of other sectors that are underperforming in comparison to others. There probably aren't many surprises there when you take a look at those categories.Let's flip the slide to Slide 6 where we're really excited to talk over a lot of the results that we're seeing. As you can see, we've had really strong upward results. We've actually pulled out April, which is one of the reasons for the delay in our update, because we wanted to actually show full April results for some of the parameters that we talked to, just to give you some more detail and more transparency into what's going on into the company during this time period. And as you can see, our April numbers are tremendous. We improved to USD 58 million UMS in April. And you can see there was a large jump from the average in the first quarter of 2020.Let's take a look at our Q1 numbers in comparison to Q4. Our active customers rose by 326% year-over-year, which put us at 1.15 million customers at the end of Q1. Our active merchant growth jumped 27% quarter-over-quarter to over 12,500 active merchants. And our merchant fees rose as a percentage of our UMS. This trend has continued even from our IPO, and we continue to trend upwards, which is really positive to see. Our repeat usage has continued to increase, which shows the strong demand for our products and the loyalty that our customers have for our products. And then finally, our net transaction margin continues to trend positively. We talked about that quite a bit during our IPO process, and we've talked about it during our quarterly results. Our goal is for growth, #1, but while we're pushing for growth, we want to continue to push for efficiencies, which means improving our net transaction margin.To the right of the slide, you can see April called out specifically. I've already mentioned the UMS record, but we also set records for active customer additions, active merchant additions. And all the while through this tremendous growth in this COVID-19 time period, our leading loss indicators have been steady to improving. Our merchant fees has remained resilient, and our net transaction margin continues to maintain a positive trajectory. I think one highlight worth noting, almost a fun fact here, our April UMS number was the equivalent of last year's January through May. That just goes to show the tremendous growth that we're experiencing as a company.On Slide 7, we wanted to touch on our strong balance sheet and liquidity. The big highlight was that our cash and cash equivalents increased from Q4 to Q1. The big driver behind that growth in cash was really that our customer receipts outpaced our payments to merchants over that time period. We also have significant room to grow with our line of credit. We've only drawn $26 million out of the $100 million line. And we wanted to point out that we believe that our -- every $1 of our line can support $14 of underlying merchant sales. Our existing line can take us through some significant growth as a company.If you flip ahead to Slide 8, we touch on our U.S. Government stimulus and financial relief. We wanted to point this out because we were quite aware that the average Australian investor may not understand everything that's going on in the U.S. economy in regards to support for our consumers and for our businesses here. So we wanted to point out the main topics on this slide and go into a little bit more detail on the CARES Act on the next slide.On this slide, we talk about the 2 main policy adjustments: The first being monetary, and the second being fiscal. We won't dwell into details here, but the main point we wanted to make was that there's quite a bit happening in the U.S. government to support our economy and to make sure that things operate as best as they possibly can during this COVID-19 time period. The Fed has cut interest rates, and they've also implemented quantitative easing to make sure that our markets can function at a high level despite all of the troubles. The U.S. fiscal policy has also been quite strong for consumers and SMEs here in the United States with a number of packages that have come out, including the CARES Act, which came out in Phase III on March 27.If you flip ahead to Slide 9, we'll cover the CARES Act. The CARES Act was significant for many of the stakeholders that Sezzle cares for deeply. First, our shoppers. The CARES Act allowed for a onetime stimulus package of USD 1,200 for anyone earning less than USD 75,000 per year. That stimulus went to both employed and unemployed citizens of the U.S. to help spur the economy. Next, for consumers that did lose their job during this time period, there was an additional stipend of USD 600 per week of unemployment for every U.S. citizen that got placed on unemployment during this time period.But the CARES Act didn't just stop with consumers, it also helped many of the SMEs that we work with through the Paycheck Protection Program. The Paycheck Protection Program was a program designed to help support SMEs and their ability to keep people on the payroll. And it worked so well in fact that the PPP ran out of funds within a few days and a second fund had to be created. We also had student loan deferrals that were pushed out until September 30 to help support students out there.And then finally, we had tax deferrals. Anyone owing taxes to the U.S. Federal Government had a deferral of 3 months that allows them to make their payment in July instead of April.We believe the government actions have made a positive impact. And while I want to argue more could be done, we believe the government will continue to take the necessary steps to support the economy and the U.S. consumer.If you skip ahead to Slide 10, we'll give you a little more detail on the leading loss indicators that are trending favorably. We've been watching these leading loss indicators quite closely from the start of the COVID-19 time period, and we've been really pleasantly surprised by everything we've seen. And it's not just all luck. We've been doing quite a bit in our underwriting and data and decisioning teams to try to tighten up on the edges to make sure that we're ready for the worst.First and foremost, you can see that graphic, our hardship requests. I think that tells the picture or paints the picture that we're seeing across many of our metrics. So when the COVID-19 pandemic first hit the United States, we did have a spike in our hardship requests through our support team. But as you can see, the absolute number of those requests is still quite low, less than 100 on a per daily -- on a daily basis. So we never saw any impact that was dramatic enough to have us really significantly worried.Additionally, our leading loss indicators that we track are also headed the right way. Those indicators are our payment completion rates on the first, second, third and fourth installments. We watch those all independently. And independently, they're all turning in the right direction. We also watch our rescheduled payments. That rate of requesting rescheduling, that's also dropping over this time period. And our dispute rates are declining in our support systems.So across the board, we're seeing quite a number of metrics head our direction. Again, not all luck. We've done quite a bit to prepare. But we also think that some of the stimulus package that we've seen from the U.S. government has helped.We'll pause there now and pass it back to the moderator to open it up for questions. Thank you.

[Operator]

[Operator Instructions] Your first question today comes from Phil Chippindale with Ord Minnett.

[Phillip Chippindale, Senior Research Analyst]

First question for me. I just want to talk a little bit more about how you've tightened up on your approvals. You've made that comment earlier on the call, Charlie, yet you still had this record increase in active customers. So can you give us a sense of maybe the quantum of tightening that you've implemented so far?

[Charles G. Youakim, Co]

Yes. So if you look at our tightening, we did it across both merchants and consumers. And I would say it was more heavily weighted to the merchant side, but that was -- earlier in the call, we talked about raising the bar for our merchant partners. And that's probably the most dramatic impact that we've had where in the past, where we may have accepted an underperforming retailer because of our growth and our hope that they could pull things in line, during this type of time period, we just could not do that. So if we saw a retailer having a higher-than-normal dispute rate or higher-than-acceptable dispute rate with our consumers or higher ticket rates or return rates, in those cases, we've had to part ways with some of those retailers. And so I think that's some of the tightening because what happens is, if you have an underperforming retailer on the platform, that leads to loss rates because the customer's upset, and they don't want to pay for the completion of that payment. So that was probably the majority of it. On the consumer side, we raised the level of what we considered fraud, where we tightened up a bit there. So that's one of our leading pathways into the product is a broad score that passes or is implied to a consumer that comes through. And basically, what we did is we just moved the needle on what we considered fraud, which tightened up a little bit. And then we also decreased our exposure. And what I mean by that is, in some cases, if a customer might have had a $2,000 limit, but was not using it, we would lower our customer down to $1,000 limit, just to reduce the chances that, that customer paid time period and might use us more in an area of need.And so those -- that's really the extent of the major move we made in terms of tightening. And it did have a slight impact negatively on volume, as you might imagine, but the demand from consumers and merchants has far outstripped those -- that decrease.

[Phillip Chippindale, Senior Research Analyst]

Second question just relates to sort of your observations about the impact from COVID on sort of the consumer spending side of things. So when we look at your UMS, you've had a big jump there. And you've obviously got an increase -- strong increase in customers as well, but that jump in the UMS suggests that there's been a strong increase of repeat customer usage. So it seems like that trend is continuing favorably. But also, I'd be interested in your observations on average order value and maybe conversion as well. But those 3 things, the frequency [indiscernible] and conversion, what are you observing so far in your business?

[Charles G. Youakim, Co]

Yes. I think those all are trending in the same directions as they have been historically. Our repeat -- through this time period, our repeat order percentages are still rising. We're getting better and better as a company around conversion. So our conversion rate may have taken a bit of a nick as we tightened up those -- with retailers and somewhat on the consumer side, but those have held quite steady.And in terms of the demand that we're seeing, our viewpoint is that we think our consumers are operating quite rationally. You saw the hardship requests spike up at the start of the COVID period, and now they're dwindling. The short-term nature of our product allows a customer really great line of sight into whether or not they're going to be able to have the funds available to repay us. And what we're thinking is happening is that customers that lost their jobs initially around the start of COVID time period, that's where that hardship requests semi-spike came from, and now it's dwindling because customers are -- our customers are realizing that they're employed or not, they're already in a situation. And now they know it, and if they're in a bad situation, they're probably not spending as much based on what we're seeing. And those that are in a good situation, they don't have a lot of other places to spend their money. And online is the only -- the last bastion. Quite personally, I'm spending online quite a bit more than I have in the past, and I think that's probably the case for a lot of the consumers out there, and that's creating opportunity for us.

[Phillip Chippindale, Senior Research Analyst]

One final question from me, and I'll jump back in the queue. You've obviously seen the investment from Tencent in Afterpay. I'd be interested in your view of that development, what you think it means for the buy now, pay later sector generally? And then more specifically, what you think it means for your company?

[Charles G. Youakim, Co]

Well, it's definitely exciting. I think what it points to is that this is a really exciting space, and there are strategics out there that are realizing that this is a place that they want to play. And we've seen that here in the U.S. We've had quite a few conversations on the strategic side. There are definitely a lot of parties that are interested. And I think the Tencent's investment or investment in our competitor is just a strong sign that we're continuing to see that sort of interest in our space.

[Operator]

Our next question comes from Ashwini Chandra with Goldman Sachs.

[Ashwini Z. Chandra, Equity Analyst]

Just a couple of questions. Obviously, you're seeing this acceleration through April and merchants are more open to sort of putting this service on their platform. Any noticeable change in whether or not these merchants, in discovering Sezzle, have also been discovering QuadPay or an Afterpay and adding a couple of these types of services on their checkout? Could you just sort of comment on how it's being adopted? I mean, are you still getting sort of a singular place on checkout? Or any evidence of sharing coming through?

[Charles G. Youakim, Co]

Yes, great question. I think we're still seeing it be kind of put down the singular pathway, but what is happening that we're noticing is that merchants that were early adopters, those are some of the retailers that are more interested in potentially exploring dual installs. So I think the first -- the merchant's first move is to get a solution like Sezzle on their platform, so the surge that we're seeing in our merchant applications. I would make the summation or the estimation that it's likely a single install with Sezzle. But as time continues, our viewpoint has always been that, very much like the credit card networks, this buy now, pay later space will operate in the same way, and there probably will be a number of dual installs where we'll head that direction in the future.

[Ashwini Z. Chandra, Equity Analyst]

Got it. And then when you talk about your sort of underlying merchant take rate continuing to tick up, I think when you report your numbers, it includes not late payment fee, but deferral payment fees or however you term it. So could you give us a sense of how much of your merchant fee percentage improvement is being driven by the deferred payment charges versus how much is actually the merchant take rate itself blending up?

[Charles G. Youakim, Co]

Yes, a good question. It's typically minimal in terms of that mix. Karen, you'll probably be the best person to answer this, but have we seen any sort of tick up? I think, if anything, we probably see a decline because of the decline we've seen recently, but Karen is probably the best person to answer that.

[Karen Hartje, Chief Financial Officer]

You're right, yes. The most recent trend here we've seen a decline in those fees relative to the total.

[Ashwini Z. Chandra, Equity Analyst]

Got it. And with respect to kind of competitor behavior, is anything you're noticing changing in the marketplace through this downturn in terms of visibility of your declines and affirms? And I say QuadPay and Afterpay, anything you broadly observed at the moment?

[Charles G. Youakim, Co]

No, nothing new. Nothing has changed in the COVID time period from anything we've seen in the last 12 months. I would say nothing -- it hasn't spurred on any differences.

[Operator]

[Operator Instructions] Your next question comes from Tim Piper with Royal Bank of Canada.

[Timothy Piper, Analyst]

Just one question around the end markets, and what you're seeing there. You called out a few sectors, the sort of top-performing and sort of bottom performing. But looking at your numbers through the month of April and the acceleration there, I mean, fashion is your biggest category. Sort of on a customer type level, what have you seen in the fashion segment in particular spend-wise? Because obviously, overall retail's down, but online rates has been very strong.

[Charles G. Youakim, Co]

Yes, good question. Fashion is actually, I think, smack dab in the middle of our sectors, which is why it wasn't one of the ones we highlighted. We realize it's one of our biggest sectors. So as a whole, it's up month-on-month, but in comparison to the other sectors within our portfolio, it's in the middle in terms of growth.

[Operator]

Your next question comes from [ Suraj Amit ] with Citi.

[Unknown Analyst]

Just a couple from me. Charlie, could you just talk through U.S. versus Canada? Maybe some Canadian volumes and how that has helped in improving first quarter numbers?

[Charles G. Youakim, Co]

Yes. Yes, good question. Canada continues to gain share as a percentage of our total revenues and underlying merchant sales. We've actually seen what I would call an angle of inclination change in the last couple of months in terms of their growth rate. So we're really happy to see that. And it just goes to show planting a seed 12 months ago takes a bit of time to take hold. We've been happy with the results up until then, but now we're really starting to get pleased with the growth. It's still less than 5% of our total revenues and underlying merchant sales, but it's picking up pace, which is great to see.

[Unknown Analyst]

And Charlie, I think you previously mentioned about potentially going into in-store, not into like a shop anyway sort of concept and things like that, a virtual guide. Just any updates on future product enhancements?

[Charles G. Youakim, Co]

Yes. It's an idea that we like a lot. If you listen to stakeholder groups, the consumers have asked us to add that feature to our product. And it's something that we're currently testing. We've got pilots out there with small groups of consumers to test the concept of shop anywhere. It's something that we believe could work, and we're excited to see it roll out. So right now, it's very, very small, just testing, but looking good. And the main point is it continues to look good and maybe iron out any kinks that we may see. We'll start to expand the access to that product to larger and larger portions of the user group.

[Unknown Analyst]

[ I was thinking upon that makes sense ]. Just do you think it's a wrong environment to launch something, not if something you are testing it, but because it could be higher losses and stuff like that? Or just how you think about that? Because we're just looking at [ losses ], it seems to have slowed in April and sort of strengthening through. How do you think about the risk?

[Charles G. Youakim, Co]

Interesting. We're definitely looking across all aspects of the product. It's not just take up, that's not the only thing we're looking at. We're also looking at the revenue, the top line that we get from the affiliate fees and also the loss rates. And then that will become part of the full evaluation of the product. And that's why as we roll out, we'll start with small user groups. We'll start to roll out to bigger user groups. And over that time period, we'll start to get some of those key indicators on loss rate will start to show up. And we'll start to have a better sense of where those loss rates might be. So we don't have that sense of where that might lie yet. And if it does look too high and the product does not look like it's a good fit, it's probably one that we wouldn't roll out, but it's something that we're going to watch all aspects.

[Unknown Analyst]

Got it. And just last one. Just on the enterprise merchant side, Charlie, any updates there in the large merchant?

[Charles G. Youakim, Co]

No. I think if there's one place where things have slowed during the COVID time period, it is enterprise just because if you look at the enterprise mix, those are the groups that either they're in the camp where they're operating, but it's all hands on deck in their operations. And they don't want to do anything right now. So if things -- if that's the case, they're delayed, and if it's -- unfortunately, if it's on the other side of things where their in-store operations are shut down, they've got bigger fish to fry in terms of problems. So if any place has slowed in terms of discussions, it's on the enterprise side, but thankfully for us, SME and midsized market is really starting to accelerate.

[Operator]

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

[Charles G. Youakim, Co]

Thank you. We really just want to thank everyone out there, all our stakeholders. And we really appreciate, again, all the work being done by hospitals and doctors and nurses out there. We can't thank them enough. We're going to keep on working hard during this time period to perform for our investors, and we look forward to talking to you. Probably the next catch-up will be at our AGM call. So looking forward to it. And thank you all for calling in, and it was great talking with you.