Sezzle Inc

ASX:SZL

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for standing by, and welcome to the Sezzle Inc. Second Quarter Earnings Conference Call. [Operator Instructions] I would like to hand the conference over to Mr. Charlie Youakim, CEO. Please go ahead.

[Charles Youakim, executive]

Good morning, everyone. As 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 Youakim, I'm the CEO and Executive Chairman of Sezzle. I'm joined today by our co-founder and President, Paul Paradis; our Chief Financial Officer, Karen Hartje; and our Head of Corp Dev and IR, Lee Brading.

I'm going to get started with the presentation now, which you can find posted on the ASX website if you'd like to follow along. 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. We have handled over $5 billion in volume, representing more than 50 million orders and had more than 15 million consumers sign up for Sezzle. I think it is a resounding yes that our product helps consumers and are proven 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 first quarter of 2022, which required us to make some tough decisions. Those tough decisions have turned out to be good decisions and have allowed us to drive and expand our product offerings to better serve our merchants and consumers.

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 the double digits, I am not aware of any other pure play buy now, pay later company that can say that they have grown the top line in the double digits and then profitably over the last 12 months. Even more, I don't think any other pure-play buy now, pay later consider they made a quarterly profit much less of profit over the last 12 months.

I believe we have done it the right way and so do others. We have been recognized for our achievements by CNBC, Forbes, Fortune and The Wall Street Journal to name a few.

What does it mean when we say we are doing things the right the right way? Slide 4 tells a 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 are front and center. 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, you can see how we've been driving change with numerous product launches with the goal of becoming an all-encompassing payment services platform for consumers. We started simply as a payment core product offering offered at select merchants and have continued to evolve to meet the needs of our users, adding such offerings like Sezzle Up, Premium and Anywhere. We recognize that consumers need more than what we currently offer. So we are done. And we plan to continue to create ways to help consumers on their financial journeys.

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 subscribers of premium and anywhere combined. Since July 1st, we have 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 60 and 70, respectively. For some context, an NPS in the 50 to 70 range means you are amongst the most beloved brands. And anything above 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 nonsubscription products, which leads to higher consumer LTVs. Because of the ease of use of Sezzle Anywhere, we're also becoming our user's top of wallet payment method. With more purchase activity, we are seeing the AOB come down, but purchase frequency is more than offsetting the AOB 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. 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 $5.7 million or 19.4% year-over-year to $34.9 million. This improvement is just a small part of the story. More importantly, from a net loss of $15.1 million in the second quarter of 2022 to a net income of $1.1 million this quarter. We do it through a combination of revenue enhancements, unit economic cost improvements and lowering nontransaction-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% of total income compared to 84.8% in the prior year. Kudos to the team.

Our engagement score card on Slide 8 is mostly positive. We have been winning the race where it matters, increasing repeat usage, subscription growth, driving traffic through our marketplace and in the process of diversifying our revenue streams away from being completely reliant on merchant processing fees. The decline in merchant count 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 have seen a drop in count. Our results show that these merchants were not driving our performance.

We have seen some decline in consumer count, but we are encouraged by recent activity that 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 Hartje, who will go over the quarterly results in greater detail. Karen?

[Karen Hartje, executive]

Thank you, Charlie, and hello to all. Before we dive in, just a reminder that our second quarter results are unaudited and presented in U.S. dollars.

Turning to Slide 9. Although we experienced a year-over-year decline in [indiscernible] in second quarter total income rose 19.4% year-over-year to $34.9 million. Our top line improvement at 9.1% 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 teams compared to only 19.3% in the prior year. We are encouraged by the sequential gain in a mass from first to second quarter of 3.6%, which also reflected a pickup in activity in June relative to April and May.

For the month of July, UMS was up 4.1% year-over-year to $147 million, which also represents a 13.5% increase compared to June 2023. Without giving too much detail, for the early days of August, we are seeing an additional pickup in UMS relative to July. In fact, One 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, second quarter '23 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, renegotiate 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.

As we discussed on our first quarter '23 earnings conference call, we anticipated that our provision for credit losses would increase, and that is the case in second quarter as shown on Slide 11. However, the provision remains relatively low despite raising 66 basis points to 1.1% of UMS in second quarter from 0.5% in first 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, we can see that second quarter '23 total income less transaction-related costs which include transaction expense, provision for credit losses and net interest expense rose almost 100% year-over-year to $18.8 million. 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-transaction-related operating expenses. For the quarter, we saw the decline on an absolute basis by 23.7% year-over-year, and decreased as a percentage of total income by over 30 points to 54.2%. Further, all core nontransaction-related operating expenses, including personnel, third-party technology and data and marketing declined in the second quarter of 2023 compared to the prior year.

In future periods, we anticipate nontransaction-related operating expenses will rise modestly as the company develops and launches additional growth initiatives.

On Slide 14, a second quarter GAAP net income of $1.1 million drives a strikingly positive comparison to the $15.1 million net loss in second quarter last year. This now represents the fourth consecutive quarter we have delivered positive GAAP net income. As Charlie mentioned earlier, we are not aware of any other pure-play buy now, pay later companies that has done so.

On an adjusted EBITDA basis, we reported $6.4 million in the second quarter of 2023 compared with a negative $9.4 million in the second quarter of 2022, yet another example that our initiatives are working.

Our capitalization, as shown on Slide 15, remains 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. Operator, will you please open the lines for Q&A?

[Operator]

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

[Phillip Chippindale, analyst]

First question, just on the bad debts and probably a question for Karen. About 3 months ago, you indicated that they would rise for the June quarter and they did. Now that you're north of that 1% mark, where should we expect it to go from here? Is this sort of about, broadly speaking, the right level for your business?

[Karen Hartje, executive]

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

[Phillip Chippindale, analyst]

Okay. 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 to talk about that in some more detail?

[Charles Youakim, executive]

Definitely before the end of the year, Phil. I mean it's an important project for us. One of the things we're looking for in terms of offerings with the customers, just providing more to them, and the partnership allows us to do that. So it's an exciting 1 for us and 1 we're really pushing on right now.

[Phillip Chippindale, analyst]

Last 1 for me. Just on the active customer numbers, and Charlie, you mentioned that number is down to $2.64 million 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 line and potentially grow from there?

[Charles Youakim, executive]

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

[Paul Paradis, executive]

So I think the primary causes to that number declining has been, number one, the outpouring of unprofitable merchants. If you think about our merchants for the primary channel to 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.

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 BNPL will 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, but it takes time. You have to acquire more merchants first, and then that leads to more customers.

[Operator]

Your next question comes from Elise Kennedy with Jarden.

[Elise Kennedy, analyst]

I've just got 2 quick questions. First, I just wanted to ask you mentioned the initiatives is just around growing consumers and merchants. Do you want to share any impact as to -- is that new products? Is there something else in the pipeline that we can think about?

[Charles Youakim, executive]

Well, the existing products, see 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's been in the mix for quite some time. It's a great engagement tool, consumer is a great differentiator for us. Those continue to be great products in terms of keeping our consumers active. Keeping consumers active is, I would say, more than half the barrel of creating a great company in financial services. The other half, I think Paul covered with the questions with Phil. Basically, as our unit economics are getting 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 push towards getting back on the growth machine. I think all of those combined is our view is why we're going to be turning that around.

[Elise Kennedy, analyst]

Great. And I just wanted to ask about the record August you've mentioned that you've had. Can you know what's at play there? How much is a function of what Sezzle is doing as opposed to the economic backdrop or is it a combination of both?

[Charles Youakim, executive]

I would say it's 90% Sezzle. At least in many ways, I think, it's a larger start-up by a lot of needs. We're an even-sized company. We're still a company that's really driven primarily by the economy. It's really our initiatives and our actions that drive the results 1 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]

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

And 1 thing to know, we're actually holding a board meet this week in the office site this week in Minneapolis. I'm looking forward to seeing everyone. Should be a great get together.

And to the investors and analysts, thank you all for listening and for your interest in Sezzle. We will talk next when we report our Q3 results in November. But 1 note before we go, our 10-Q will be filed with the SEC next week on August 15th 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.