Sezzle Inc

ASX:SZL

Earnings Call Analysis

Sezzle Showcases Robust Financial Health

Sezzle, a financial technology company, has processed over $5 billion in transactions and signed up more than 15 million consumers since its inception, positioning itself as a major player in the 'buy now, pay later' sector. The company has achieved a 20% EBITDA margin and a low single-digit profit margin while growing its top line by over 20%. With a return on shareholders' equity above 35%, Sezzle demonstrates strong financial stewardship. Additionally, their unit economics margin improved to 49.2% from 44.5%, and operational expenditures, not related to transactions, dropped to 46.2% from 65.5% of total income, indicating efficiency gains.

Delisting from the ASX and New Financial Horizons

In a strategic shift to consolidate their securities exchange presence, the company is seeking to remove itself from the ASX official list, narrowing its trade activities to the NASDAQ. This move is driven by a majority of security holders being based in North America and the potential to enhance shareholder value through increased liquidity on a singular platform. Alongside this structural shift, the company hits a significant milestone, processing over $5 billion in volume, indicative of their expanding reach and operational scale.

Impressive Earnings Turnaround and Margin Growth

The company has exhibited a dramatic turnaround, moving from a negative EBITDA margin in Q3 2022 to an impressive 18.5% in the same quarter of the current year. This 20% EBITDA margin achievement over the last 12 months reflects diligent improvements in unit economics and a more efficient operating cost structure.

Increased UMS and Net Profit Amid a Diverse Revenue Stream

Underlying Merchant Sales (UMS) shot up by 11.4% compared to the previous year, boosting total income by 34% year-over-year to $40.8 million. The following month saw October UMS climb by a striking 20%, crowning it the highest UMS month for both 2022 and 2023. This financial high tide has also been reflected in net profits, reaching $2.7 million or $0.02 per share.

Optimization of Transaction Expenses and Operating Costs

Payment processing costs, a significant component of transaction expenses, improved by 9 basis points year-over-year to 2.1%. The downward trend in non-transaction-related operating expenses, which decreased by 5.2% year-over-year to 18.9% of total income, sets a new precedence for cost management and contributes positively to the overall financial health of the company.

Strengthened Balance Sheet and Promising Financial Projections

The organization has not only grown its profitability but has also cemented its financial stability by augmenting stockholders' equity by over $12 million to a robust $18 million. Exhibiting a significant 35.7% return on equity over the past year, the company sets an example for stellar financial governance. This consistent performance is indicative of the effectiveness of their strategic initiatives, exemplified by recording their fifth consecutive quarter of GAAP net income, and suggests a promising financial trajectory for the foreseeable future.

Earnings Call Transcript 2023-Q3

[Operator]

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

[Charles Youakim, executive]

Thank you. Good morning, everyone. As to those joining us from Sezzle's home in United States, good evening, and welcome to Sezzle's 2023 Third Quarter Earnings Call. My name is Charlie Youakim, I'm the CEO and Executive Chairman of Sezzle. I'm joined today by my Co-Founder and President, Paul Paradis; our Chief Financial Officer, Karen Hartje; and our Head of Corp Dev and IR, Lee Brading. In conjunction with this conference call, we filed an earnings announcement and presentation on the ASX, which we will speak to. So please go to the ASX website to find our presentation if you would like to follow along. Before diving into the presentation, I would also like to note that we have submitted a formal application to the ASX for removal of the company from the official list of the ASX. We are currently listing on 2 securities exchanges, the ASX and the NASDAQ Stock Exchange. And after the process is completed, Sezzle will only be tradable on the NASDAQ. The Board of Directors of the company has determined that this is in the best interest of the company and its security holders for a number of reasons, including Sezzle's primary listing is not in Australia but the United States, where we are already required to file with the SEC, the additional cost savings from not being listed in 2 markets, the geographic considerations with the majority of our beneficial ownership located in North America and the low liquidity of trading volume in CDIs. We anticipate consolidating the listing to the NASDAQ to increase liquidity in the remaining markets. Sezzle delisting is subject to the ASX approval and any conditions that ASX may impose in conjunction with any such approval, if granted. Full details will be contained in an announcement, which is anticipated to be lodged with ASX next Monday. Now let's dive into the presentation and our quarterly results, starting with Slide 3. This season I'm excited about what we've accomplished in such a short period of time is an understatement. We are helping a great number of people on their financial journey and the numbers speak to this. Since our launch, we have processed over $5 billion in volume, representing over 58 million orders, and we have had over 15 million consumers sign up with us. Further, we have done this in a financially responsible way for shareholders. In the last 12 months, we have generated an EBITDA margin of 20%, posted a profit margin in the low single digits, grew the top line by more than 20% and provided a return on shareholders' equity in excess of 35%. I'm not aware of any other pure play by now, pay later that can say the same. And we couldn't have achieved those results without a strong connectivity to the consumer, and they are voting for us with their feet as we have now surpassed 230,000 subscribers and with their hearts as we have received 4.9 stars out of 5 on the Apple App Store and 4.7 stars out of 5 on Google Play and Trustpilot. You might say Slide 4 looks familiar, and you'd be right. Our mission of financially empowering the next generation is job #1, and we want to make sure this is clearly understood. 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 potentially building credit fills an important gap for people who may be facing difficulty in their daily lives when it comes to making payments. Since our inception, we have been committed to driving change to financially empower people on their financial journeys. As noted earlier, consumers are voting for us with their feet as we have surpassed 230,000 subscribers to our subscription-based products, Sezzle Premium and Sezzle Anywhere, as shown on Slide 5. The amount of engagement has been phenomenal. Subscriber frequency is higher than nonsubscribers by 20%, and they shop at a broad array of locations from everyday purchases such as grocery and service stations to meeting their discretionary needs at clothing and specialty stores. Further, we are literally opening doors for shoppers as almost 40% of our Sezzle Anywhere subscription user activity has been in store. Again, going back to our mission, we are financially empowering the next generation. To gauge the satisfaction of users, we track the Net Promoter Scores closely through a random survey implemented through a third-party tool. In case you aren't familiar with NPS, anything above 50 is fantastic. And if you are above 70, well, that's the Holy Grail. So to have Sezzle Premium sitting in an NPS of 62 and Sezzle Anywhere at 70, means we're doing something right. Our success has been driven by a team effort, and that is evident on Slide 6, as sales, partnerships, marketing and product teams have played vital roles. During the quarter, we signed up over 200 new merchants on the platform, representing over $9 billion in gross merchandise volume. Meanwhile, our partnerships team has expanded our platform presence with WooCommerce and JustiFi. We talked about how we are growing beyond direct-to-merchant and are enhancing our direct-to-consumer position. This is apparent in our marketing and product teams. We recently hired a new head of marketing with over 20 years of e-commerce and digital marketing experience. This team is now working on several consumer marketing campaigns to further improve consumer acquisition and engagement. Additionally, we continue to make a number of product adjustments that enhance the consumer experience. Our improved gift card checkout flow has resulted in an 84% increase in consumer sharing gift cards with others. Our introduction of pay-in-full and pay-in-2 has been well received as those options represent over 10% of our order volume in the quarter. Our in-app volume rose 33% year-over-year as we continue to improve our marketplace experience. And last but not least, the number of consumers enrolled in our Sezzle up credit reporting products increased 40% year-over-year. While each of these might seem like minor items on their own, they add up to be a significant driving force for our success. On Slide 7, I would like to provide an update on our fiscal year 2023 initiative that we announced earlier this year. These initiatives are on pace to deliver $10 million in annualized bottom-line improvement that we set out to achieve when we first launched them. 3 of the 4 initiatives are completed and have been performing in line to ahead of our expectations. Our bank partnership initiative is still in progress. Admittedly, we hoped it would be completed in 2023 but nonetheless, we are making great strides and remain very optimistic about the future opportunity. We will be in a better position to provide a more detailed update on our bank partnership progress when we report our fourth quarter results. Turning to Slide 8. It's quite clear that our initiatives have made a positive difference. A lot of green on the screen, which is a good thing. A couple of items to point out. We went from a negative EBITDA margin position in the third quarter of 2022 to a positive 18.5% EBITDA margin in the third quarter of this year. We have achieved this by improving our unit economics and leveraging our operating cost structure. On a year-over-year basis, our unit economics margin improved to 49.2% of total income from 44.5%. And our non-transaction-related OpEx as a percentage of total income declined to 46.2% from 65.5% the year prior. While everything is not green on our engagement scorecard on Slide 9, the red areas are being addressed and moving in the right direction. We have also been winning where it really matters, increasing repeat usage, subscription growth, consumer order frequency and diversifying our revenue streams. Although our active consumer count is down year-on-year, we are seeing stability in this number in recent weeks. We believe the multitude of initiatives that we have implemented are having a positive impact and are encouraged by the future as additional initiatives in the pipeline should assist us further. Similar to our discussion last quarter, the decline in merchant count might seem alarming but it's not. Generally, these micro merchants do not drive our business. We implemented the minimum volume hurdles for merchants to remain on the platform and have thus seen a drop in count. Our results show that these merchants were not driving our performance. Further, our shoppers have the ability to shop beyond integrated merchants with our subscription products, making this metric not as important as it once was. With that, I'm now happy to turn the call over to our CFO, Karen Hartje, who will go over our 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 third quarter results are unaudited and presented in U.S. dollars. Turning to Slide 10. I am happy to note that after 2 straight quarters of UMS declining year-over-year, our UMS rose 11.4% in third quarter compared to the prior year. The increase in our UMS, coupled with our continuous drive to diversify our revenue stream led to total income for the quarter, increasing 34% year-over-year to $40.8 million. We are excited about the start to fourth quarter and what the upcoming holiday season holds for us as October UMS rose 20% year-over-year to $176.5 million, representing a new monthly high in UMS for 2022 and 2023. On Slide 11, third quarter 2023 transaction expense comprised primarily of payment processing costs, improved slightly by 9 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 to and pay-in-full that reduce our fixed installment processing costs. As discussed on previous earnings conference calls, we expected our provision for credit losses, as shown on Slide 12, to increase throughout the year compared to the first quarter. For the upcoming fourth quarter, we expect a moderate increase relative to the third quarter due to a seasonal pickup in volume but we still anticipate the provision for fiscal year 2023 to outperform the 1.7% provision for fiscal year 2022. Turning to Slide 13. Our unit economics puts us in a good position to further expand our profitability. In third quarter, total income less transaction-related costs increased 48.4% year-over-year to $20.1 million. As shown on Slide 14, non-transaction-related operating expenses declined 5.2% year-over-year to $18.9 million and set a new company low of 46.2% when measured against total income. Not only are we leveraging non-transaction-related operating expenses relative to total income but we also continue to manage them successfully on an absolute basis. We are hyper focused in this area and believe that it is reflected in our results. We have now recorded our fifth straight quarter of GAAP net income as shown on Slide 15. We are not aware of any other pure by now, pay later that can make a similar claim. On an adjusted EBITDA basis, we reported $7.6 million in the third quarter of 2023 compared with negative $1.3 million in the third quarter of 2022. Another example that our initiatives are working. Turning to Slide 16. Not only are we focused on growing our top and bottom line but building a solid balance sheet and capital structure. In the last 12 months, we've increased our stockholders' equity by over $12 million to $18 million. Even with the significant increase in stockholders' equity, we recorded a return on equity of 35.7% over the last 12 months. Our capitalization is stable, healthy and continues to show improvement each quarter. I would like now to turn the call back over to Charlie.

[Charles Youakim, executive]

Thanks, Karen. With that, we are now happy to take your questions. Operator, will you please open up the lines for Q&A?

[Operator]

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

[Phillip Chippindale, analyst]

Charlie, first question just for you, just on the customer numbers. You said that recently that they sort of started to stabilize. Is that really a function of your cycling an easier comp now? Yes, just I'd like to understand that dynamic a little bit just because those customer numbers have been coming down for some time.

[Charles Youakim, executive]

It's really on both sides, Phil. So we -- the engagement piece has improved for us because of our additional products with premium and anywhere. So we're keeping in the existing customer base more active and more engaged and there's less churn from that base. And we're also seeing increase in new customers coming into the platform. So a little bit of both at this time.

[Phillip Chippindale, analyst]

Okay. When I think about your subscriber numbers as a proportion of your active customer base, obviously, that's continuing to climb partly due to the denominator effect. But that numerator, the absolute number now at 230,000, what sort of growth rate would you sort of expect in that subscriber number going forward over the next 6 to 12 months? Should we see that sort of just modestly continue to grow?

[Charles Youakim, executive]

I think the best projection is, Phil, we don't have one for [indiscernible], first of all, where we expect it to rise to. What we've basically been looking at is our past performance. I think what we've found is that it's easier to convert customers that are more engaged currently. But as we continue to improve the business, I think the plan is introducing new products to customers when they're active with us, when they're more engaged with us, and that's the best time to convert them over. But really, I'd probably point to past performance is the best projection for anyone looking at things.

[Phillip Chippindale, analyst]

Okay. Just last one for me. It would be remiss if I've been asked about the removal of the ASX listing. I recognize that you're not expecting to make an announcement until Monday, so you may not be able to answer this question but just on time frame, is there anything you can talk to us there about time frame? Obviously, there's announcement on Monday but have you got a sense of how long this process may take?

[Charles Youakim, executive]

No. We'll have more details on Monday. We don't have any more details for you, Phil, today. I'm sorry, I can't -- nothing to say at this point.

[Operator]

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

[Charles Youakim, executive]

All right. Thank you. First of all, another big shout out to the Sezzle team for continuing to crush it. I also want to thank our investors who have continued to believe in us over this time period. And we're looking forward to talking to you when we report our fourth quarter results. Have a great Tuesday, everyone.

[Operator]

Thank you for participating. You may now disconnect.