Sezzle Inc

ASX:SZL

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for standing by, and welcome to the Sezzle Inc. First Quarter 2023 Results Call. [Operator Instructions].

I would now like to hand the conference over to Mr. Charlie Youakim, Chairman and CEO. Please go ahead.

[Charles Youakim, executive]

Good morning, everyone. For those joining us from our home here in the U.S., good evening, and welcome to the Sezzle Inc. 2023 first quarter presentation.

My name is Charlie Youakim. I'm the CEO and Executive Chairman of Sezzle, and I will be leading the presentation today. I'm joined on the call by our CFO, Karen Hartje; our President; Paul Paradis; and our Head of Corp Dev and IR, Lee Brading.

In the first quarter, we started the year out as planned by continuing to improve the profitability drivers, which is increasing total income in the 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. But 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. We're still in a period of economic uncertainty, which has us prioritizing profit over growth.

That being said, we are getting more aggressive again. Back in 2022, we analyzed initiatives in an almost nice really fashion, looking for immediate ROI. In 2023, we've let the team know that we can expand ROI pipelines 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.

I'm proud of what our team has accomplished in the first quarter 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 typically not a strong one for our sector.

We have more initiatives in the works. We've been busy [ seeds ], and we're excited to tell you more. I'll jump through 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. So let's get started, keep in mind that all dollar amounts here are in USD.

On Slide 3, you can see key products that are driving the results we're seeing today. Premium and Up. When I plan Sezzle today, I'd like to focus on the key pillars of the organization. Our core product is still a gain for BNPL products, no doubt about it. That product has changed the lives of millions of consumers and thousands of merchants. Our core product remains the pillar product.

But as we continue to get some other consumer, we're starting to understand themes around what's important to them. The first is financial empowerment and that's 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 to start of launching Up, we can feel it. But today, we haven't updated to measure it and the result is impactful. For the average Up member, we're raising their credit score by 20 points in the first 4 months. That's regardless of agents bet 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.

Second, we know consumers want more access with our managed systems. This is where our Premium comes in. 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 Anywhere Card comes into play. We expect Anywhere to become yet another product from Sezzle that should create financial tailwinds, just like Up and Premium have already.

We have found that both Premium and Up and like the Anywhere, enhance, engagement and retention to our consumers. It's because we're giving them what they want.

And you can see that played out on Slide 4 with our consumer reviews, we monitor these consumer reviews closely. We have launched a number of new products since early 2022, and the worse to make it happen is disappointing for gifting franchise and our existing customers with those new products, especially the ones who already love 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 going well because we're building the products that our consumers want and need.

If you look ahead to Slide 5, we start to hit through 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 by of $35 million for the quarter. GAAP net income you can't even put a percentage on that one or at least one that's meaningful. We win from loosing $28 million to making $1.7 million in the quarter. Our unit economics were a great result here, which changed from a slim margin to a large one, moving from 0.8% 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 a picture of how we got there. We added income from other sources. Merchant processing fees are down as a percentage of total income it could be grew our top line from other business initiatives such as Premium.

And finally, we're doing all this great work with a smaller [indiscernible] team. Our decision in 2022 to focus on North America and still paying dividends.

On Slide 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 on hand in production in unit economics and our efficiency. We turned $34.7 million in total income, $21.4 million of gross profit. That's a fantastic conversion percentage with 62% of top line is converting into our gross profit. This is why I keep talking about operational leverage.

With that level of efficiency, we end up 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 sprint with that leverage. The only metric to drop in our scorecard are our active consumer and active merchant numbers on Slide 8.

We are loosing micro merchants. And in turn, some active consumers as we make the trade-off from growth to profitability. One key driver of that was our implementation of our merchant fee, if the merchant does not had a minimum monthly cost and volume. We lost micro merchants that we now hold the data fee.

But as you can see from our numbers, merchants at Bass and [indiscernible] don't correlate with merchants that drive volumes and income. The more good news on the numbers here are around engagement. 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% of total line.

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 Hartje, who will walk through some of the financial details. Karen?

[Karen Hartje, executive]

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 first quarter '23 UMS totaled $369.8 million, down from $450.5 million in first quarter '22. 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 offboarding unprofitable merchants.

While underlying merchant sales declined, first quarter 2023 total income increased by 25.5% to $34.7 million from $27.6 million in the first quarter 2022.

On a quarterly basis, total income as a percentage of UMS increased to 9.4% in first quarter '23, 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 first quarter '23, up 188 basis points from the same quarter a year ago.

On Slide 10, you can see that first quarter 23 transaction expense totaled $8.2 million or 2.2% of UMS compared with $11.8 million or 2.6% of UMS in first quarter '22. Transaction expenses comprised primarily to payment processing costs, and these costs as a percent of UMS decreased because of our payment strategies to incent customers to choose ACH as their primary payment option.

Additionally, we are seeing the benefit of favorable renegotiated terms with network partners as well as the benefit of paying full, as a payment option for consumers at the point of sale.

On Slide 11, you'll see the first quarter provision for credit losses totaled $1.7 million or 0.5% of UMS. In addition to continuous improvement in underwriting driven by the profit machine learning model, receivables originated in 2022 performed better than expected, resulting as a benefit recognized during first quarter '23.

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.

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 $21.4 million in first quarter '23, 5.6x to $3.8 million from first quarter '22.

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 13, while income less transaction-related costs improved year-over-year, so did nontransaction-related operating expenses. First quarter '23 nontransaction-related operating expenses decreased by 38.7% to $19.3 million over the same period last year, with improvements across the board from third-party checking data to marketing, to personnel.

As a percentage of total income, the ratio was more than cut in half from 114% in first quarter '22 to 55.7% in first quarter '23. Last year, $4.4 million of professional fees associated with the proposed and ultimately terminated Zip merger was recognized in the first quarter. As we pursue growth opportunities and implement our next round of initiatives, we expect nontransaction-related operating expenses to increase modestly.

On Slide 14. Fourth quarter GAAP net income was $1.7 million during a striking comparison to the $28 million net loss in first quarter '22. This is the third consecutive quarter that we have delivered positive GAAP net income.

On an adjusted EBITDA basis, a non-GAAP measure, we reported $8.3 million for first quarter '23 compared with negative $17.8 million in first quarter '22, and positive $7 million 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 subscription premium product Sezzle Premium.

On Slide 15, at the end of the first quarter '23, we had total cash of $60.6 million, comprised of $59 million in unrestricted cash and $1.5 million in restricted cash. The first quarter 23% 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 $59.8 million drawn on our line of credit as of March 31, 2023, compared with $65 million at year-end.

At March 31, we had $84.8 million in net notes receivables and $65.3 million in merchant accounts payable, of which $51.3 million was attributable to the merchant interest program. Given our positive operational performance and healthy liquidity condition, we are comfortable with our current capital structure.

Now I will pass it back to Charlie to close out the presentation.

[Charles Youakim, executive]

Thanks, Karen. 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 on city works both ways. If volumes dropped, reduced strong rates on gross profit and our OpEx stays flat. We basically had a breakeven net income, but our adjusted EBITDA still comes in quite strong at $2.1 million. That $2.1 million removes stock comp and interest expense for those out there.

The part of the result that does pan out this year is the year-on-year look at the numbers. We're significantly better running this business year-on-year when we compare the results to last year. We also continue to attract more users into Premium, which spans at 155,000 subscribers. Premium is now a major part of our business less than a year in its launch.

On Slide 18, we want to remind you that we still 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 million in net income on an annualized basis through 3 key drivers.

First, the launch of an Anywhere Card formally the first card. By giving our customers more access to use our systems, where they want to use this, we book that our revenue, income and engagement numbers will continue to grow.

Second, through further monetization of our marketplace challenge. We continue to increase engagement in the app, and we're doing it in a win-win sort of way. We keep on adding merchant deals with discounts on attractive and building relationships to that ecosystem that lead to happier customers and additional income.

Finally, through a main 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 detail add that in full, but for now, we're leaving a bay 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 FORUS removal. This removal allows U.S. citizens to buy several shares on the ASX, which will allow for more demand from our home market where our product is present.

Next is our NASDAQ listing, which also ties to a reverse stock split. Due to NASDAQ listing rules, we have to have a stock price above USD 4 for list with NASDAQ. Based on our own research and discussions we have at equity capital market debt for the United States, we targeted a post-split price in the double digits. Thus we decided on a 38-1 reverse stock split.

We've also made good progress with that to NASDAQ to file this year, so we think we can go live with NASDAQ before the end of the quarter. We're definitely excited about that how many companies get to ring a bell on an exchange, and now we're going to do it twice. Well that's all for the quarterly update. We hope you enjoy the monthly update. We love the cadence and plan to continue to do it for the foreseeable future to keep you updated with our continued progress every growth level.

I'll now hand it back to the moderator for Q&A.

[Operator]

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

[Phillip Chippindale, analyst]

Charlie. First question, just looking at Slide 18 and these FY '23 initiatives that you've outlined. I'd just like to unpack a couple of those. Firstly, just on the Anywhere Card, can you just run through the revenue model here, please?

[Charles Youakim, executive]

Yes. Good to hear from you, Phil. The first thing, basically 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 pass the card that's present in their mobile app anywhere they want to use it. So the revenue model consists of subscription as well as interchange revenue. Those are the core drivers of the initial launch of that product.

[Phillip Chippindale, analyst]

Okay. Great. Just turning to the bank partnership, you sound like you remain tight lid 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.

[Charles Youakim, executive]

Yes, we definitely have progress with the relationship. We're not talking about plans, they are file of [indiscernible], but they're underway. I don't know if you can give any more details on how far along, but we do expect to be a big part of the drivers of that $10 million in net income.

So we're going to be -- to get that done, we're going to have to complete that in the near-term for that to have additional impact on the second half.

[Phillip Chippindale, analyst]

Okay. And I suppose just in terms of that breakdown and contribution to the $10 million across the 3 different categories that you've identified. I mean, you just made a comment there that the partnership will be a significant component of that $10 million. Should we think of it as being -- is it roughly 1/3, 1/3, 1/3? Or perhaps you could just draw us to where the most amount of value is going to be breaking from you?

[Charles Youakim, executive]

I think probably more towards any work hard bank partnership. Where the weightings are just probably out of 1/3, 1/3, 1/3. I would say the top and bottom items are probably the bigger drivers. But again, these are products that are not necessarily launched. Was there more of an estimate at this point.

[Phillip Chippindale, analyst]

Okay. Just touching on Slide 11 and the credit losses. This might be a question more for Karen. The first quarter '23 figure of 0.5% was an extremely low number. And you indicated in your discussion earlier that you'd expect that to rise over the balance of calendar '23. 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?

[Charles Youakim, executive]

Karen, you want to take that?

[Karen Hartje, executive]

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

[Phillip Chippindale, analyst]

Okay. Great. And Karen, maybe while you got on floor again, and this is the last question for me. It's just looking at the nontransaction-related operating expenses. There's a nice chart on Slide 13. We saw a slight uptick into the first quarter of '23 to $19.3 million. Is it fair to assume that you think that you'll perhaps past the low point in that OpEx?

[Karen Hartje, executive]

So, I don't -- that could be a fair assumption. I would also say that in first quarter of '23, we -- or in the first quarter, we always have higher professional services expenses because of our annual audit. So it's kind of the seasonality in the first quarter, and then we are adding a few staff positions.

[Charles Youakim, executive]

Look further color on that one. I think I can't say it could bounce around a bit, but our goal is to keep relatively flat this year. We start to have better than expected results, then we'll start to hit on the GAAP a little bit more, which means running the team size. But I would still say relatively flat.

[Phillip Chippindale, analyst]

Okay.

[Operator]

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

[Charles Youakim, executive]

Thank you. In closing, I just want to sum the other shout out to the Sezzle team. We continue to do a great job in executing our plans and the results are coming through. 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.