Sezzle Inc

ASX:SZL

Earnings Call Transcript 2021-Q3

[Operator]

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

[Charles G. Youakim, Co]

Thank you. Good morning, everyone, or to those who are joining from [indiscernible], good evening, and welcome to the Sezzle Inc.'s 2021 Third Quarter Presentation. As mentioned, my name is Charles Youakim, I'm the CEO and Executive Chairman of Sezzle, and I will be leading the presentation today. As I think you'll see, Sezzle continues to grow at a tremendous rate in an exciting sector. As we just attended in the industry conference, which was exciting in its own right, given we haven't had a conference for nearly 2 years. But at that conference, we can really sense that our company has tiered up in our importance level in the financial services industry. That lift should only help us in the years to come. I'm happy to be here today to give you a rundown of our third quarter results. I'm joined on the call by our CFO, Karen Hartje; our President, Paul Paradis; and our Head of IR, Lee Brading.We'll now move on to our presentation. If you haven't already had a chance to pull it out, and you can find our presentation posted on the ASX website if you'd like to follow along. So let's get started. So please move ahead to Slide 3. [indiscernible] our mission is to financially empower the next generation, which is leading our company towards the path down additional financial services for our young consumers. Our first expansion in that direction are Sezzle Up, which is our credit building platform and our long-term installment offering, both of which will be important products for us for years to come. Our core product improves consumer financial freedom through simple budgeting accomplished through industry [ involvements ] and support the financial freedom of our customers with our core product [indiscernible]. We focus on making our product [indiscernible] for our merchants, too. Simple even effective is a mantra for our SMB clients. Our seamless integration provide e-com and payment platforms to make it easy for our merchants to add several payment methods. And once added, you can dramatically improve their results by increasing sales, conversions and [indiscernible]. We also drive traffic to our merchant partners via our app and our website. All of these benefits make our products incredibly sticky for merchants. [ Not only ] sticky for the merchants but we're also growing virally. You can see that by virality our results on Page 4. We now have over 3.2 million active consumers and over 44,000 active merchants who collectively have transacted USD 1.6 billion in cost in volume through Sezzle over the past 12 months. Our product is sticky with consumers, too. They love us. We do ran surveys from our consumers to measure their love of their products. The 30-day [ trim ] consumer Net Promoter Score stands at 85. Yes, 85. [ That one ] leads to more engagement and a store and potential energy for Sezzle or as we offer new products, our consumers will trust our ability to deliver. Our top 10% of active customers transaction average are 49x per year. And collectively, our customers have downloaded our app 2.7 million times. On Slide 5, we're proud to display some of the new merchant partners that we signed. Wakefern represents a significant [ test ] in the grocery segment. California Pet Pharmacy represents a similar [ test ] into pet and vet care. We also signed some great name brands in our core segments with Lamps Plus, TSC, Market America, Bellami and Rogers Sporting Goods to name a few. These signings have helped us maintain steady growth in UMS as we head into the fourth quarter. On Slide 6, you'll see that our SMB virality has continued as well. We added over 4,000 active merchants in the quarter. Just to put that in perspectives, we only had around 5,000 active merchants on the platform in total when we IPOed on the ASX about 2 years ago. That virality continues because of our continued excellence in execution and the results we give our SMB partners. A 30-day Net Promoter Score for our merchants has been quite as amazing with our consumer score, but it does sit at 71, which is also a tremendous result. On Slide 7, we wanted to talk about our partnerships accomplishments over the quarter. Our partnership approach is a differentiator in our space, which we believe will set us apart and help us grow at a greater pace in the years to come. First, Alliance Data and Bread. The launch of this partnership represents a continued to grow for our long-term platform. We now have 2 great partners for that product with Ally and Alliance Data, both working with us to create a superior long-term offering. Our partnership with Bread is exciting because their product has an outstanding user experience in the mobile environment and because we're going to able to unlock a lot more of our SMB volumes via this new partnership as we will be the merchant of record for Bread. We'll also be able to unlock more potential through Bread's strength in additional merchant categories. The second partnership we wanted to lay out is with is BigCommerce. BigCommerce is an incredibly powerful e-commerce platform. They've had great success in scaling their offerings, and we believe that our preferred partnership with them will benefit Sezzle tremendously. Through the partnership, Sezzle will get preferred placement for new retailers on the BigCommerce platform, and we'll also be working closely with BigCommerce on enhancing the payment offerings for existing merchants on the platform by offering several other new buy now, pay later options for them. Finally, Sezzle Capital which we created through our Wayflyer partnership allows us to help our merchant partners grow their businesses. It's a win-win type of situation because as we help our merchants grow, we grow. [ Higher ] exhibits are continued growing consumer engagement. Our consumers love using our products. The user base is growing while the engagement also continues to grow. We have now had 33 consecutive months of increased repeat usage and now sit at 92% of transaction volume coming through our repeat customers. Our campaign activity accelerates that engagement. We've got 2 campaigns planned for the holiday season with Sezzle Bingo and Sezzle Home 4 the Holidays. These types of campaigns are inexpensive and fruitful at fostering positive engagement. Slide 9 highlights the recognition we received from our key stakeholders. I personally love that were viewed as the best buy now, pay later app for students. We couldn't pick a better award. We'll continue to work hard for our stakeholders which should keep this type of recognition coming. [indiscernible] Slide 10, where we want to talk to you about an overview of our international progress. Canada, with a little over 2 years past launch has become a big success for us. At this point, it's a scale entity, accounting for over 6% of our total UMS. Our goal in Canada now is continue the expansion and push for product parity with the U.S. with addition by Sezzle Up and the long-term installment loans into that product suite. India is also scaling this with some impressive quarter-on-quarter growth rates as we continue to push for complete product market fit.We're currently on a similar user and merchant trajectory to the U.S. and Canada at the same stage there, which is exciting. The main challenge in the geography is adapting our products to the existing payment rails in a way that offers a great user experience. UPI is a payment rail that represents a good portion of consumer payments in India, almost replacing the need for a debit card. We're currently a waiting game for UPI automated payments, which will allow us to improve our user experience there tremendously. We'll continue to scale and improve as we push for product market growth. EU is also scaling with some initial enterprise merchants like The Hut Group which are creating synergies with our user core markets of the U.S. and Canada. Our product is now live in Germany, France, Spain and Italy, and we're exploring expansion into the U.K. We're still under a year from product launch there, so we'll likely need all of 2022 to fully understand how large of a market the EU will be there for us. And finally, Brazil has just gotten started. We're currently building a roster of private merchants and expect to launch our product there by the end of the year. I'm going to hand off the presentation to our CFO, Karen so that she can now take you through our financial updates, which concludes the presentation. Karen?

[Karen Hartje, Chief Financial Officer]

Thank you, Charlie. Before we start the financial update, please note that our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles. Third quarter financial results for 2021 and 2020 are unaudited and presented in U.S. dollars. Starting on Slide 11. We are reporting continued strong growth in UMS and total income. Third quarter 2021, UMS totaled $460.7 million, reflecting a 102% increase over third quarter 2020 UMS at $228.2 million and a 12% increase over second quarter 2021. What's driving the growth in UMS is the 3.2 million active consumers, 44,400 active merchants, 92.3% repeat usage, a record for the 33rd straight month. Third quarter total income was $28.5 million, reflecting a 79% increase over the same quarter last year. Total income included $24.5 million in Sezzle income and $4 million in account reactivation fee income, which comprised 14% of total income. As a percentage of UMS, total income was 6.2% for third quarter '21, down from 7% in third quarter '20 and 6.7% last quarter. The merchant rate compression reflects the first full quarter of large-scale enterprise merchant fee income. On to Slide 12. Third quarter '21 total transaction expense was 2.5% of UMS compared with 2.7% for third quarter '20 and 2.3% last quarter. The most significant element of transaction expense is payment processing that dropped from 2.1% of UMS in third quarter '20 to 1.9% in third quarter '21, driven by ACH migration and lower processing rates due to increased scale. While down year-over-year, third quarter '21 payment processing was up 0.2% of UMS from last quarter. This increase was driven by a shift to card for all first installments, including ACH. As a result, the percentage of payments processed via ACH decreased from second to third quarter '21, but has still improved year-over-year. We remain committed to strategies to drive down processing costs, including continued payment migration to ACH. Moving to Slide 13. As a percentage of UMS, third quarter provision expense totaled 2.3%, down 110 basis points from 3.4% last quarter. When we spoke to our second quarter results, we committed to reducing loss rates into the low 2% range by fourth quarter this year. We are pleased to report that we achieved this goal in third quarter '21. During the quarter, we executed against new collection strategies driving higher recoveries of previously charged-off receivables. Our risk management team also made fundamental operational changes during the quarter, including the change to require a card payment for all first installment payments and changes to line assignment and line management strategies to reduce risk. On to Slide 14. Net interest expense in the third quarter was 25 basis points of UMS, reflecting significant improvement from the 50 basis points for the same quarter last year and 5 basis points improvement from last quarter. The year-over-year reduction in funding costs was due to the new lower cost $250 million debt facility closed in February '21. Moving to Slide 15. We believe we are well capitalized for the future. At the end of September '21, cash totaled $46.9 million with $5 million drawn against our line of credit and unused borrowing capacity of $87.8 million. This compares with our June '21 cash position of $60 million with $21 million drawn against our line of credit and unused borrowing capacity of $56.8 million. Our merchants select to defer their transaction accounts payable in exchange for interest. This amount totaled $78.6 million as of September 30, '21, compared with $79 million as of June 30. In July of this year, we received an investment of $30 million from Discover, providing incremental capital to execute our growth strategies, along with our $250 million line of credit. I'll turn it now back to the moderator for your questions.

[Operator]

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

[Phillip Chippindale, Senior Research Analyst]

First question, just around bad debt expense, obviously, a huge improvement in the quarter. Karen, I think you mentioned improved recoveries and then the card being required for ACH. But if we go back to August, you spoke about the challenges of the nonoptimized integration with some of the larger retailers. So I suppose my question is, has that yet been resolved? And if not, then does that mean that when you've made amazing improvements without the optimized integration, and so does that mean when we look forward that potentially there's some further improvement there?

[Charles G. Youakim, Co]

Karen, can you take that?

[Karen Hartje, Chief Financial Officer]

Sure. Yes, I would. Once -- first of all, we talked about how we planned to have the direct integrations with our large enterprise merchant clients, it would be in the first half of next year. So it's going to be a while before those direct integrations happen. But when they do, we certainly do expect that we'll see improved quality of the customers that are using our product.

[Charles G. Youakim, Co]

But I would say -- sorry, as we said, in the meantime, we feel like we've got a good handle on the situation now, but the direct integration will undoubtedly help.

[Phillip Chippindale, Senior Research Analyst]

Right. And just before you've got the floor -- sorry, the challenges of working [indiscernible]. Obviously, a bad debt improvement of that level, where you positively surprised by that sort of the speed of that improvement? And certainly, it's well ahead of what you guided to in August.

[Karen Hartje, Chief Financial Officer]

No, no. I was not surprised and I would tell you why. Go ahead, sorry, Charlie.

[Charles G. Youakim, Co]

No, go ahead, Karen.

[Karen Hartje, Chief Financial Officer]

I was going to say I was not surprised. And the reason was we've always said this is largely within our control. And we also talked about last quarter how we had opened up to some of the new enterprise merchants, and we can -- again, we can control the underwriting, not only of our new customers but of our existing customer line assignment strategies.

[Phillip Chippindale, Senior Research Analyst]

Okay. And I think it's -- sorry, Charlie go ahead.

[Charles G. Youakim, Co]

Yes, one of the key elements of the product that is worth pointing out to everyone is that the turnover. It's the product that turns over in 4 weeks. And so we can make rapid changes and how things develop and continue in the future. So I think that's one thing that I continue -- we want to continue to point out to everyone listening in that we're pretty nimble as a company in terms of the changing directions.

[Phillip Chippindale, Senior Research Analyst]

Karen, maybe another question for you. Just on the fee rate. Clearly, we've seen a little bit of a decrease here in the current quarter. Is it fair to think about that decrease is reflecting now sort of the full contribution from your enterprise relationships that you've currently got on foot? Is that a fair comment?

[Karen Hartje, Chief Financial Officer]

Yes. Yes, it is. And that's what I meant by saying this quarter was really the first full quarter where we have these large-scale enterprise merchants for the full quarter.

[Phillip Chippindale, Senior Research Analyst]

Okay. Final question and just back to Charlie. Charlie, you've got 2 relationships regarding long-term products with Ally and Ally Financial. But can you just explain how that works from a customer perspective? If I not a retailer, am I going to see 2 offerings there for a long-term product? Yes, can you just maybe walk through how that works?

[Charles G. Youakim, Co]

Our long-term goal with that product, it's going to depend on the volumes going through, but our long-term goal is to really create a platform where we can offer each customer, depending on the situation with the merchant and the scenario, the right spending options and those might be via different providers depending on the situation. And the goal is really to create the widest sweet spot for both the consumer and the merchant to create the best possible results, to get the consumer the financing that they're looking for at a reasonable rate and they get the merchants the conversion for the sale of that product. And what's difficult to do -- if you're a single provider, you generally get boxed in to the type of approvals you can make. And so by making the platform, it allows us to pull in a wide array of potential providers to expand the sweet spot. That's very attractive to the merchants that we talk to, especially enterprise merchants, which should increase our ability to land those big deals because of this platform. And I think it will only get better and better in the future. Ally and Bread, both have fantastic products. And we're excited to see where they can take us. The Alliance Data products with Bread helps us a little bit in the near term in that because we're the merchant of record with Alliance Data and Bread, we can expand to our SMB base more rapidly. That's been holding us back a bit and now we can really push that forward, which should unlock a lot of latent volume within our systems once that launches.

[Operator]

Your next question comes from Chris Brendler from D.A. Davidson.

[Christopher Charles Brendler, MD & Senior Research Analyst]

Congrats on the results. Can I start with the decline in the sort of merchant take rate? Is there an account reactivation or late fee impact there as well or is that without that?

[Charles G. Youakim, Co]

I don't quite understand that. Fee rate -- the merchant fee rate?

[Christopher Charles Brendler, MD & Senior Research Analyst]

Yes, but including the account reactivation fees.

[Karen Hartje, Chief Financial Officer]

Yes, account reactivation fees are included in Sezzle income.

[Christopher Charles Brendler, MD & Senior Research Analyst]

Right. And so there's also [Technical Difficulty]

[Karen Hartje, Chief Financial Officer]

I'm sorry, you cut out. I mean -- but I think you asked that they are also impacted by the lower merchant fee rate? And the answer would be no. Those are consumer fees.

[Christopher Charles Brendler, MD & Senior Research Analyst]

No. I was saying that as credit got better, so if credit got better in the third quarter, there was a commensurate impact on lower late fee income in that rate as well or no, in terms of decline from the second quarter to third quarter? Sorry. [indiscernible]

[Karen Hartje, Chief Financial Officer]

[indiscernible] activation fees are lower. That's correct.

[Christopher Charles Brendler, MD & Senior Research Analyst]

Okay. Okay. On the ADS relationship, the 40,000 merchants, is that a subset or their base that could grow larger over time? And maybe just talk about the potential opportunity. It sounds like a pretty significant integration, and I guess, how fully will be integrated into those merchants that are working with ADS?

[Charles G. Youakim, Co]

And so Chris, we still do a bit of work with our SMBs to get them -- there's some more information we need to gather from them, but we're going to do that in an automated way to get that onboarding process rolling out. And then once they do that, I think those things considering the 41,000 merchants, not all of them have the right product set to take advantage of the long term. A lot of these are retailers selling fashion and apparel, which may not be a long-term fit. So there's going to be a subset that have the right product mix that will be seeking out a long-term product. So I think there's -- [ you need to take that ] down a bit and some of the potential there. But the thing worth mentioning is this product continues to improve, it's going to enhance the ability for our sales teams and marketing teams to go after new merchants that do target long term. And so I think there's a bit of unlocking the volume within the existing SMB base, but [indiscernible] [ probably ] bigger impact in the future in terms of what our sales teams can go after.

[Christopher Charles Brendler, MD & Senior Research Analyst]

That makes ton of sense. That's great. One last one for me. Charlie, [indiscernible] this earlier, you have potential for adding additional financial services products? How important is that opportunity and -- in terms of a time line?

[Charles G. Youakim, Co]

Yes. It's tough to say on time line. [indiscernible] possible. We're always thinking and moving fast, of course, because we're a younger company that's more nimble than most companies. But I think in the long-term vision, it is very important. First of all, these customers are looking for additional financial services, and they're not doing that services that they really need. And we view it as an opportunity. We view our product as a tremendous customer acquisition product. You're getting paid as you acquire consumers. So you've got a profitable business acquiring consumers. And you know after you work with these consumers that were the perfect entry point into financial services where we put a training [ to your ] products. We treat them very well and they can't get too far over their SKUs. And as we educate these consumers and get them into credit building, we know that they will be looking for additional financial services as they age, as they grow. And we want to be there for them. And if we can do that, that helps us increase lifetime value of the customer. And as their lifetime value of customer increases, we can expand our network more rapidly. And so I think that's a virtuous circle that we're really thinking about, and we'll be pushing towards that in the years to come.

[Operator]

[Operator Instructions] Your next question comes from Siraj Ahmed from Citi.

[Siraj Ahmed]

I'll ask 3 questions. First one, would you really share how big enterprise is as a percentage or your investment, [ percentage ] of share?

[Charles G. Youakim, Co]

Siraj, that's something we've broken out at this time in terms of the breakdown.

[Siraj Ahmed]

Okay. Okay. And then just I think Phil asked this question as well. But as you head -- I mean, you had 1 full quarter of contribution, but would it be fair to assume that the contribution is increasing as you head into the second quarter? So that we should be thinking the merchant take rate [ is going to ] decline?

[Charles G. Youakim, Co]

I think we are pushing deeper and deeper into enterprise. That's a goal for us. And so what we've talked to everyone about is that as we do that, we do expect to see some temporary dips in that merchant fee rate. And we expect to see it come back up as the users start to utilize our platform to shop at our merchant -- our complete merchant network. So it's difficult to know the exact sort of timeline of those ebbs and flows into merchant fee rate. But we are starting to see a lot of enterprise merchants take up the product. And so I think -- and maybe the year to come, there might be a little bit of movement in that number. And -- but it's just really difficult to say which way it goes because it's the timing of enterprise merchants coming on is really the key to that.

[Siraj Ahmed]

Got it. And secondly, Charlie, can you just explain that debit-credit swap out of ACH? It looks like the losses were higher on the ACH, is it just because of a delay or just keen to understand why the swap out?

[Charles G. Youakim, Co]

Sorry, I have a little trouble picking that one up, Siraj. Karen, do you want to take that?

[Karen Hartje, Chief Financial Officer]

That's the reason we made the change to require card for the down payment is that with ACH, there is a timing that could potentially allow for first payment default, whereas with card payment, you eliminate that risk.

[Siraj Ahmed]

Got it. Okay. That makes sense. And lastly, Charlie, just on your view of being a platform, right? How do you think about the net transaction margin or the gross profit margin for, let's say, a dead transaction, right? Is that dilutive accretive to your current several sort of margins?

[Charles G. Youakim, Co]

It really depends on the mix. So if it ends up being more SMB volume coming through that, it's incredibly accretive, I would say. Is it -- so that's where the color of SMB really lies. As you push the product into enterprise, I'd say -- it's probably right part of the course where we sit today. But what's so fantastic about our product is that it all drops to the bottom line. This is a product that the only cost for us is the software that supports it, which we're building anyway. It's opening up new opportunities for us just at the conference that I mentioned. And we have -- we are talking to a big potential that we [ want to build and talking about ] if we didn't have the long-term products. So I know we've made a great choice in adding these products, and I think it'd really help us to be a tailwind for us in the years to come.

[Operator]

The final question comes from [ Hal Goetsch ] from Loop Capital.

[Unknown Analyst]

I think it's a good definition of what a merchant of record is in with Bread and Alliance Data systems and how it facilitates onboarding of these smaller merchants?

[Charles G. Youakim, Co]

Yes. Great question, Hal. So to help understand what that means is when a merchant comes on the platform, if the merchant is the merchant of record in the system, the underwriting from the long-term provider has to go all the way through to the merchants. And so you can imagine the 41,000 active merchants or 44,000 active now, it takes quite a bit of time to turn on merchants. Until what we're able to do with Bread because the merchant of record as long as we're collecting the necessary KYC AML information from our merchants, we're able to make the decision to turn on merchants for Bread and probably we'll sit in the middle as merchant of record, which allows us to turn on merchants quite a bit faster because we've already done the underwriting work on the merchants that come through. And so that's where the important distinction comes in terms of this platform.

[Unknown Analyst]

Okay. If I had to ask a follow-up on that, this would mean the onboarding of a small merchant to offer a credit program that is almost similar in some ways, but probably [ difficult ] to say a large retailer has a giant credit program with a major bank. This could be for a small merchant probably not be not even possible, and this makes it very possible and very quickly, you could do it quickly then as well. Is that kind of...

[Charles G. Youakim, Co]

I think that's spot on. Yes, that's spot on. I think a lot of these small merchants might have trouble getting access to a product like this. Typically, it might take a lot of skill from them to get there, and now we're able to provide it to them.

[Unknown Analyst]

Okay. What do you think the onboarding time would be for you to help them basically piggyback your merchant of record status?

[Charles G. Youakim, Co]

Really, this is a few items they have to upload into our dashboard in order to satisfy the requirements. So it's really just an additional step. We really try to focus on simple, easy and effective for the SMBs because we know they want to be self-service. So the first time they go through our platform, they get live with our core platform in under 24 hours. This will just be a second step, where we'll ask the merchant if you want to enable this long-term option, please upload a couple of additional options or elements. And once they do that, we're able to make the second investigation for underwriting and allow us to turn them on at that point.

[Unknown Analyst]

Okay. I think one last follow-up. [indiscernible] smaller merchants, you were the buy now, pay later provider. And Bread is going to bring you with Alliance Data like a longer installment loan type capabilities. Is that the whole plan to have a suite of offerings from these merchants, buy now, pay later in terms of weeks all the way up to installment loans?

[Charles G. Youakim, Co]

Exactly. That's our plan. We want to have a full spectrum product for any merchant that applies Sezzle to their checkout. We think it's really powerful offering, not just perhaps indeed, but for -- especially for enterprise.

[Operator]

There are no the questions. I'll now hand back to Charles for closing remarks.

[Charles G. Youakim, Co]

Thank you. I wanted to make a statement here, and I know it's a bit early, but first off, I want to wish everyone a happy holiday season. We're not going to talk again until after it. It's going to be -- and also a seemingly important fourth quarter for us. So you can count us working hard to make it a great one. Additionally, it's going to be great to see the restrictions lifting here on COVID. It's been a long time [indiscernible] Australia, and we can see a light at the end of the tunnel, and we're looking forward to being back over there to see all of our friends and supporters. I want to thank you for your time today. Have a great rest of your day. Thanks.