Sezzle Inc

ASX:SZL

Earnings Call Transcript 2022-Q4

[Operator]

Thank you for standing by, and welcome to the Sezzle Inc. Fourth Quarter 2022 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]

Hello, and welcome to the Sezzle Inc 2022 Fourth Quarter Presentation. My name is Charlie Youakim, I'm the CEO and Executive Chairman of Sezzle, and I'll be leading the presentation today. I'm joined on our call by our CFO, Karen Hartje; our President, Paul Paradis, and our SVP, Corp Dev and IR, Lee Brading. I'm happy to announce that in the fourth quarter, we achieved GAAP profitability. This was done as our planned improvements were still rolling through the system. As you may recall, we told the market in our second quarter presentation that we expected to post a monthly profit on an adjusted basis by the end of the year. We exceeded that guidance with our achievement of an entire quarter of non-adjusted GAAP profitability.

As many investors that follow us know, this profitability achievement is rather unique to our industry and to tech companies in general. We got to a profitable stage through a host of initiatives that we laid out to the market throughout the year. And we kept investors up to date through regular monthly updates, so you could track our progress. I'm happy to say we not only met those expectations, but we exceeded the expectations that we provided to the market over the year multiple times. We believe that we achieved it. We did it by focusing on the goal of profitability and by never strengthen that path.

For me, it was by far the most impressive achievement. I've seen by a team working together in my career. It was also a lesson for me that profit is a path forward. It's made everything easier for us as a company. Every person and every group within the organization has the same end goal. We're going to keep the path forward focused on maximizing profit for the company while providing the best service to our customers and merchants. And that doesn't mean we're strength from our B Corp philosophy. I think the themes behind being a B Corp in being a profit-maximizing company, work in concert.

Being a B Corp is all about serving your stakeholders and maximizing their assessment of your organization. That's something that we still do. We will still do it because of great stakeholder management actually helps maximize profitability over the long term. As a large shareholder myself, that's something that's very important to me. I want to give our shareholders a few thoughts to keep in the back of your mind as we continue to go to the presentation.

First, we believe we're just getting one done. We know it's not just about 2023. It's about the next 5 to 10 years. We're thinking about those future years on how to go from achieving profitability to $10 million in income and then $30 million and then $50 million and then $100 million. My point, we're not just trying to maximize near-term profit, we're thinking about future profit streams and about DCF models and our own safe valuation and what we need to do to improve.

Second, I want you to all be thinking about operational leverage because I know we have it. And I believe that you're going to see it come to the forefront this year and over the next few years. This business scales wonderfully.

We can double volumes without significant additions to our operational expenses. This January was basically breakeven from a GAAP net income perspective. That shows you where the water line is on operational leverage. As we grow from here, be passing the benefits of our favorable unit economics or MCM dollars for those that know us well right through inefficient operational expense with most of the dropping to the bottom line. Finally, we've done a lot of the hard work that we see many of our competitors starting now. We use secured funding for our receivables into 2024, and we have a strong and growing liquidity position heading into the year.

We've also already scaled back our business in the core markets, which we are now set on going through a concerted effort in those markets. And finally, despite the concerns of the contract, we have been able to show a steep reduction in loss rates and delinquencies while still growing our revenue and income.

In summary, I believe that our investors will see that we've done a great job in adjusting the business to meet the demands of this new economy. Let's get started on walking through the presentation. If you'd like to follow on and find it both on the ASX announcements page and attach has been exhibited to the Form 8-K which we filed with the SEC's EDGAR website. Let's get started, and please keep in mind that all dollar amounts here are in the USD.

I wanted to touch on Slide 3 quickly to reiterate the B Corp philosophy of how and why they're helping long-term investors. Our B Corp philosophy is helping guide our brand creation and delivery. To me, Sezzle is the flagship behind that philosophy. We've then got no other BNPL fintech company in the U.S. has done. We've supported young consumers by helping them build their credit scores while they use our products. We built that because we wanted our product to be something we want our own kids fees.

I know I want my side putting up their credit score. So we added that capabilities to our products a couple of years ago. This product is a big win for our customers and our brand. And I think we're still just at the tip of the iceberg was up, and here's what it can do with us and shaping out to help our customers more to come.

On Slide 5, we cover some of the highlights on our financial scorecard. As I mentioned earlier, we've grown top line income year-on-year despite major adjustments to the business. We've also turned the company to cash flowing and GAAP net income generating company in the fourth quarter. Like many financial credits out there, I'm not a huge fan in non-GAAP numbers, but we want to show adjusted EBITDA because it's a proxy for cash flow, ex working capital. You continue to put up a positive $3.9 million in EBITDA for the fourth quarter. Another common metric, adjusted EBITDA shows a similar positive dynamic, but with an unlevered balance sheet.

Total income plus transaction-related costs is a proxy for our gross profit for NTM. We'll be highly focused on growing this number in future quarters while keeping our OpEx flat. And the metric to the right of that is essentially our unit economics is the percentage of UMS. I always try to simplify things as I think about the business, and here's how it simplify the things behind that metric. For every additional $100 million in UMS we put through the business, we would add about $4.5 million in gross profit. This is where the operational leverage comes in.

On Slide 6, we cover engagement. Here is now all increase, as you can see some of the effects of adjusting the business. While these metrics are important, I think some of these can be vanity metrics. And we're not interested in vanity here at Sezzle or simple we're more meat and potatoes. Active consumers and active merchants dropped year-on-year, a good portion of that drop was our choice. We aren't interested in leasing many support the vanity metrics. So we made some choices that turned away consumers and merchants.

We still have some more adjustments coming to the business, so I believe you may continue to see these vanity metrics reduced in the coming quarters as we complete our strategic plans. Everywhere else in this slide, we're seeing positive changes. Even though the active consumer counting dropped, our engagement with that group has increased both through the app and through order activity. Our marketplace with premium leading the way has been a big success. That's what's driving all the increases across the page. Premium with over 130,000 subs is in less than a year since launch, an important product for us and the driving force behind our financial performance.

And speaking of premium, if we move ahead to Slide 7, you'll see it mentioned again as one of our successful initiatives for 2022. The slide also shows the time line of our initiatives we announced to the market. A year ago, you may remember we started the improvement process. We announced our workforce reduction in March. And at that time, we estimated it would result in approximately $10 million in annual benefits. We improved that guidance to $17 million in improvement in April with the announcement that we intended to exit Brazil, Europe and India.

And in July, just after we exited our planned merger with Zip, we told our investors that we believe are now $50 million of initiatives would get us to a monthly adjusted profitability metric by year-end. As you point out here, we had a mix of revenue-related initiatives and cost-related initiatives in the basket. To put it simply, we not get out of the park on this. Our initiatives went so well that we came back and told you all to expect another $10 million in September. And now that we nearly finished delivering all these initiatives, we're seeing $70 million in annual improvements. A final result that was 40% better than what we guided to in July.

On Slide 8, you can see the mix of these improvements. As you can see, we showed up losses significantly. But I think it's worth noting that usually investors think they can count on cost initiatives more than revenue initiatives when the company starts talking about making improvements. We did the opposite. The vast majority of our improvements came from the revenue side with projects like Premium. The way I think about this is that we've turned our stored potential energy in the business into kinetic energy. And we're not done, by the way. We're going to keep the momentum going.

We'll cover our plan for 2023 in a couple of slides. But first, I wanted to -- because our provision was still improved incredibly over year-on-year, we wanted to dive into how we did that. In short, it's centered around technology, a unified strategy around profit and focus. Slide 9 covers the profit model. And with that mean, you can give a sense that what we're getting about our focus on profits. Everything and everyone in the business was focused on profit. That excluded the internal naming of our decisioning models. One benefit of the mistakes in the past is that they give you data on what not to do.

Our decision seems took the data from 2021 in prior years to create a new model, which they don't, the proper model. It's a model built on the latest machine learning technology, and it was deployed in the fourth quarter of 2022. As you can see in the call out on the bottom left, the profit model gave us modeling that allowed us to effectively target a lower principal loss rate while minimizing loss volumes. Our financial results beat our model expectations as we posted a 1.2% provision for the fourth quarter. The profit model is just another initiative in 2022 that has turned up incredibly well for the company.

On Slide 10, we're giving investors some quick snapshots of our Q-on-Q improvements and a broad overview of what's to come in 2023. The quarter comparison is jaw dropping but the bar was low, too low. With our profit-focused approach to business, I believe a lead quarters like that in 2021 are going to be in our rear view. The take looks at the past fourth quarter numbers and especially our operating structure cost percentages. This is the area we're highly focused on here at Sezzle.

As I mentioned, we're going to be reflecting our operational leverage muscles in 2023, which should drive that operating percent down as we grow our top line and our unit economics. The team knows that we use a saving. So as we grow, you should see mostly dollars dropping through to GAAP income, and more initiatives are coming. We guided to an additional $10 million in annual benefits to the bottom line. We're guiding to an additional $10 million in benefits coming to the bottom line from the next 12 to 18 months, depending on how quickly we can get them launched.

We're going to be expanding premium with our enterprise solution, which we believe will drive additional revenue income and please our shoppers even further. And we're also working on deepening partnerships with banks in order to drive additional revenue and income to the business. We have a few more initiatives in the mix that are leading to that $10 million improvement. But for competitive reasons, we're going to keep the details light for now. I hope overview of giving you a good sense of what's been going on and what we plan to continue to work on in 2023.

I'll now pass it over to Karen Hartje, our CFO, who will cover the remaining financial metrics. Karen?

[Karen Hartje, executive]

Thanks, Charlie, and hello to all. Charlie, did mention this, but just a reminder that our results are presented in U.S. dollars. Starting with Slide 12. As we discussed in our last couple of quarterly updates, during 2022, we sharpened our focus in pursuit for profitability, and our fourth quarter results reflect our strategic direction. Fourth quarter '22 total income was a record high of $38.3 million, up 16% from $32.9 million in fourth quarter '21 and up 26% from $30.4 million last quarter. As a percentage of UMS, total income hit a new high in fourth quarter '22 at 8.5% versus 5.9% in fourth quarter '21 and 7.2% last quarter.

Consumer engagement remains strong as repeat usage increased to 94.2% and our weekly average marketplace volume increased to 29.2% of fourth quarter '22 volume, up 18 points from fourth quarter '21. Fourth quarter '22 UMS totaled $452.3 million versus $561 million in fourth quarter '21 and $421.5 million last quarter. The year-over-year decrease reflects credit risk improvements related to the profit machine learning model that Charlie reviewed earlier and supports our strategy of reaching profitability as well as competition.

Moving to Slide 13. Fourth quarter '22 transaction expense decreased to a new low of 2.1% as a percentage of UMS, reflecting 37 basis points improvement from fourth quarter '21. What is dragging this change, transaction expenses comprised primarily of payment processing costs, and those costs as a percentage of UMS decreased because of our payment strategy and then consumers to choose ACH as a primary payment option. Additionally, we renegotiated more favorable terms with our network partners and launch pay in full as an option for consumers at the point of sale.

To Slide 14. Our improved proprietary underwriting strategies, including the profit machine learning model, drove the improvement in the fourth quarter provision for uncollectible accounts to 1.2% of UMS, 233 basis points better than the same quarter last year. Managing the portfolio risk was a key factor in reaching profitability in fourth quarter '22. For the full year ended December 31, '22, provision expense was $1.7 million as a percentage of UMS, and we expect that rate to slightly increase in 2023 to support top line growth.

Moving to Slide 15. Total income less transaction-related costs reflected a new high in fourth quarter '22 by $20.2 million or 4.5% of UMS. This compares with a net loss of $2.2 million or negative 0.4% UMS in fourth quarter '22. We exceeded our previous all-time high set last quarter of $13.5 million or 3.2% of UMS by nearly 50%. We speak to this non-GAAP measure because it reflects our underlying unit economics and shows the improvement in total income, transaction expenses and the provision for uncollectible accounts that we just discussed. The stronger unit economics, we can be more competitive in pursuit of growth opportunities in 2023.

On to Slide 16. While income less transaction-related costs improved year-over-year and quarter-over-quarter, so did nontransaction-related operating expenses. For fourth quarter '22, nontransaction-related expenses decreased to $18.6 million, representing a decrease of 21.4% over the same period last year and notably reflects a 41% reduction from the peak in first quarter '22. The 2022 reduction in workforce and cuts to third-party spend drove the improvement. 2022 full year revenue and cost initiatives drove the improvement in nontransaction-related expenses to 48.6% of total income for fourth quarter '22 and represents a record low, which is a good thing for us. We expect to continue to leverage our operating structure in 2023.

Moving to Slide 17. Fourth quarter '22 GAAP net income was $0.6 million positive during a striking comparison to the $25.9 million net loss in fourth quarter '21. As a reminder, third quarter '22 net income was positive due to the $11 million payment received from Zip as part of the transaction termination. On an adjusted EBITDA basis, a non-GAAP measure, we reported $3.9 million for fourth quarter '22 compared with negative $24.5 million in fourth quarter '21 and negative $3.4 million last quarter. We turned the corner on profitability as measured by adjusted EBITDA for the first time in fourth quarter '22 with stronger unit economics and a more efficient cost structure. From its quarterly charts, you can see the trend. We plan to increase profitability for full year 2023 through sustainable top line growth and new initiatives that are expected to add over $10 million in total income over the next 18 months.

On to Slide 18, as of year-end 2022, we had total cash of $69.5 million, a price of $58.3 million in unrestricted cash and $1.2 million in restricted cash. The fourth quarter '22 increase of $10.8 million in cash on hand was driven by additional borrowings under the line of credit. At quarter end, we had $93.4 million in net accounts receivable and $83 million in merchant payables, including $66.5 million in the merchant interest program. Given our liquidity and positive operational performance, we do not foresee any near-term capital raises.

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

[Charles Youakim, executive]

Thanks, Karen. I'm going to cover our January update here as we close because despite a slight dip on the net -- GAAP net income, I do think it shows the continued progress with the company's efforts. Please flip ahead to Slide 20. In general, we saw a decline in UMS versus the holiday period, which isn't surprising. But what is great is that we're explaining how our shifts in the business model have really strengthened our numbers. If I get displayed in December, we're still doing about a 10% top line on our UMS through the system, which led to $11.7 million in top line total income and basically a breakeven in GAAP net income.

Our adjusted EBITDA came in at about $1 million, which gives you the proxy for cash flow. We're still winning there. It's just the offsetting stock-based comp and other additional noncash items that are driving us to the native. January was still healthy given our economic environment. But I think what is really important to think about here is that January is the water line for what it will take to drive monthly net income. To keep these numbers in mind, we do about 10% in top line out of our UMS and we do about 4.5% for our gross margin equivalent.

Now my illustration here is all on a rough basis, but with those numbers in mind, put through an additional $20 million UMS through January. If that occurred, we'd add up $2 million top line income and almost $1 million gross margin earning $10. We wouldn't need to do anything significant to OpEx to support that. As you let that sink in, you can start to see how we're thinking about running this business. We're going to be working on making that illustrative example of reality each and every month.

Thank you all for listening in. We'll now hand it back to the moderator for Q&A.

[Operator]

[Operator Instructions] Your first question comes from Chris Brendler from D.A. Davidson.

[Christopher Brendler, analyst]

Congratulations on the progress. I wanted to start with the discussion of the rate expense for 2023. Did that sort of suggest, in terms you provide more to support growth. Is that widening the current aperture buying new merchants? Or is there also a macro component to that provision expense forecast?

[Charles Youakim, executive]

Karen, do you want to cover that.

[Karen Hartje, executive]

See the increase -- the site increase that we talked about in provision expense is generally related to pursuing our top line growth. And we believe that with the additional products that we've offered that have strengthened our margin, we'll be in a more competitive position to present options to our enterprise prospects.

[Charles Youakim, executive]

So Chris, I think in terms of the provision and basically for the projections being at that level. We do expect to be a little bit more aggressive. Now we're going after things. And I think we're also being a bit conservative compared to fourth quarter. You saw the profit model or our predictive modeling system had numbers that were slightly higher than what we actually printed for the fourth quarter. So I think what was trying to be reasonable and measured as well in our expectations of that coming year.

[Christopher Brendler, analyst]

I guess I'm curious like, I guess the next question is as you sort of increase the raising aperture to support growth, what's the time line you think on going back to growth? I know you've had a lot of progress on the property side, it's been a transition, but I imagine you started in comps as the year progresses. And it does they feel is important in UMS goes through a key focus for 2023.

[Charles Youakim, executive]

Absolutely. I'd say UMS growth is one of the key areas. But as we mentioned, profits is the key. And so when we're looking at UMS growth, we're not going to be pushing for UMS growth at the expense of profits. So it will all be profitable. And as we pointed out in the release, we're already seeing growth this January to February, 8% month-on-month just early here in the year. And obviously, the first 2 months can we have the holiday season for a company that's quite tied to retail. Where we expect some of this drop. And our view is that this is based a the waterline or growing from here?

[Christopher Brendler, analyst]

Okay. Just one last follow-up on that topic is as you target growth in terrorists, do you think it's more proving more consumers, adding more consumers, activating more consumers or growing the merchant footprint as being a focus.

[Charles Youakim, executive]

Well, I think growing our subscription product, premium in our marketplace, that's part of it, but also really going after merchants again. I don't know, Paul, you want to hop in and discuss some of the thoughts we have towards the merchant growth. I mean that's really Chris where it comes into for us is we've always been the business that's been 2-sided adding merchants helped consumers. We don't do any direct-to-consumer advertising involved through our partnerships. Paul, anything to add?

[Paul Paradis, executive]

Yes. I think you noted there at the end. I think as opposed to our -- some of our competition, which have done a lot of direct-to-consumer advertising, we really relied almost solely on our merchant relationships. And so the growth in UMS, growth in customers is going to come from new merchant growth as well as just getting better presenting from our existing merchants as well. But there were several major headwinds to UMS in merchant acquisition this past year that we believe were short-lived.

We made several decisions that impacted our ability to grow, including off-boarding merchants, repricing merchants that were in the queue, more conservative underwriting. I think the planned merger with Zip also made it difficult for us to acquire new merchants because merchants were concerned with the longevity of our brand and our platform. And so they didn't want to install Sezzle and then have to install a new platform 2, 3 months down the line. So now that we have our own clear path and also improved economics with our product to make us more competitive in market that we'll be able to start acquiring new merchants in a much faster pace, starting immediately.

[Christopher Brendler, analyst]

Yes, I'm sure it also helps that you're profitable and growing in here for a long time. So congratulations again, thanks for taking my questions.

[Charles Youakim, executive]

Yes, Chris, I mean, that's worth pointing out to everyone listening on the call. I think when you're talking to enterprise merchants especially, they want to know you're going to be there, I know you're going to be there for the next 2, 3, 4, 5 years. And there's nothing better than telling the merchant you're going to be there the means possible right now. Absolutely.

[Operator]

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

[Phillip Chippindale, analyst]

First question, Charlie, you've referenced the expanding of the premium product earlier in your presentation. I think you did mention anywhere product as well. Can you just expand on that? What are you referencing there on the premium side of things?

[Charles Youakim, executive]

Yes. Thanks, Phil. Those 2 are tied together, the annular and expanding premiums. So currently, the way premium works is that customers can get access. The way to think about our business is premium is the access portion of the business and app is the financial empowerment portion of our business. Those are 2 flagships that we have beyond us in the branding and our approach to the business.

Right now with premium, the access is all driven through our app. You have to shop through our app to get access to merchants like Amazon or Walmart or Lowe's et cetera. We do realize, though, that that's still limited. Customers want to be able to shop everywhere. So it all was to expand premium even one step further with an anywhere card for premium that allows the customer to shop outside of the app. And I always give you an example of the diagram. In one of our customers want to the diagram. There's probably a 0 chance we're going to have that in our app, but now they can use it at that location and use pay and forward, if they want to use it. So that's what we're thinking about in terms of expanding the products and just continue to meet the demand of the customer.

[Phillip Chippindale, analyst]

Okay. Great. Last question for me is just the average income that you are recognizing your January update, you've said a total income reached 10% of UMS. What's driven that latest leg up to that 10% mark? I mean I know you've reached the 9% range more recently. But clearly, you continue to surprise us to the upside there.

[Charles Youakim, executive]

Yes, I think it's basically all the initiatives. Marketplace is a big part of the premium end marketplace, driving customers into the app where you can drive additional affiliate revenue. That's a big part of it as well. Premium is an incredibly strong product in terms of top line percentage or the more we drive consumers in the premium, the more that we'll find that we push that. And maybe we were at more of a steady state in December was about the same number as January but more it's over sort of the 10% steady say right now. But that is definitely top of mind for us as a company. I rethinking about growing the business. We want to keep on pushing for higher-margin products in the mix, which will continue to potentially help push that number even further north.

[Operator]

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 again wanted to thank our team at Sezzle for their incredibly good work over this past year. The team has been absolutely amazing, as I mentioned, it's been really fun to work alongside everyone I missed. I'd also like to thank the investors that continue to support us. I hope that you're smiling year-to-year as we complete this presentation as an investor myself and the company. I'm also incredibly happy with this result. Thank you all for your support, and have a great day.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.