FlexShopper Inc

NASDAQ:FPAY

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the FlexShopper Second Quarter Financial Results Conference Call. [Operator Instructions] Thank you.

I would now like to turn the conference over to Carlos Sanchez, Investor Relations. You may begin.

[Carlos Sanchez, executive]

Thank you, and good morning. Welcome to FlexShopper's Second Quarter 2024 Financial Results Conference Call. With me today are Russ Heiser, our Chief Executive Officer; and John Davis, our Chief Operating Officer.

We issued an earnings release yesterday, which we'll be referencing during today's call. Our earnings release and SEC filings can be found on our Investor Relations section of our website. We will be available for Q&A following today's prepared remarks.

Before we begin, I would like to remind everyone that this call will contain forward-looking statements regarding future events and financial performance, including statements regarding our market opportunity, the impact of our growth initiatives and future financial performance. These statements should be considered in conjunction with cautionary statements in our earnings release and the company's most recent periodic SEC reports, including our annual report and quarterly report 10-Q for the quarter ended June 30, 2024.

These statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements. Except as required by law, we undertake no obligation to publicly update or revise any of these statements whether as a result of new information, future events or otherwise.

During today's discussion of our financial performance, we will provide certain financial information that contains non-GAAP financial measures under SEC rules. These include measures such as EBITDA, net income and adjusted net income. These non-GAAP financial measures should not be considered replacements and should be read together with our GAAP results. Reconciliation for these measurements and certain additional information are also included in today's earnings release, which is also available on the Investors section of our website.

This call is being recorded, and a webcast will be available for replay on our Investors section of our website. I will now turn the call over to our CEO, Russ Heiser.

[Harold Heiser, executive]

Thank you, Carlos. Thanks to everyone joining us for this morning's call to review our second quarter performance. I'll start today's call with an update on the growth strategies we are pursuing, and then we'll turn the call over to JD who will discuss our operations and financial results in more detail before we take your questions.

I'm pleased to report that FlexShopper produced a strong quarter of year-over-year growth with total revenues increasing by over 29%. In addition, profitability increased significantly as we experienced a 90% expansion in gross profit. Adjusted EBITDA increased from approximately $300,000 in the 2023 second quarter to almost $5 million in the 2024 second quarter. This is the highest second quarter adjusted EBITDA level in 2 years.

Overall, our 2024 second quarter performance reflects the success of the long-term strategies we are pursuing to drive profitable growth and to create lasting value for our shareholders. It also demonstrates the differentiated platform we have created and the value we provide to our retail customers and B2B partners.

We have pursued strategies to expand our financing options, which have resulted in a full suite of payment solutions within our digital marketplace. Today, our platform consists of traditional lease-to-own offerings, unsecured consumer loan products and a traditional e-commerce retail business with a growing range of financing options. In addition, we offer diverse payment solutions to customers directly through our website as well as through partnerships with leading e-commerce and brick-and-mortar retailers in the automotive, electronics and pawn segments.

There are several important components to the marketplace we have created that I'd like to review today. We have partnered with multiple technology and funding partners to provide flexible payment solutions to any customer that engages with us directly or through one of our merchant partners. The technology we have created seamlessly routes applications through our network to find a payment solution for our customers' unique credit profile.

We have made significant investments over the past year upgrading our digital resources, partners and systems to support our internal underwriting, collections and account servicing capabilities. Not only does our tech-enabled platform create value for our customers through a fast and convenient application process, but it also allows FlexShopper to proactively manage risk to enhance the effectiveness of our marketing initiatives.

We have recently added new capabilities that allow customers on our FlexShopper.com website to receive payment options that fit their credit profile. In conjunction with this, we have broadened the product assortment available for sale on FlexShopper.com. This expanded marketplace is resonating with consumers and broadens our addressable market to serve more customers regardless of their credit score.

Since launching these capabilities during the 2024 first quarter, we have seen steady growth, and retail revenue increased from $780,000 for the quarter ended March 31, 2024, to $1.4 million for the quarter ended June 30, 2024. In addition, since its launch, we have seen consistent growth in monthly retail revenue as the confidence in our capabilities increases, we expand our marketing spend to drive traffic and pursue opportunities to improve conversion.

Based on our recent performance and the strategies we are pursuing to grow the FlexShopper marketplace, we expect retail revenue and gross profit to continue increasing over the coming quarters. As I briefly mentioned earlier, we also continue to add more SKUs and product categories to the FlexShopper sites to gain a larger share of our customer spend.

We continue to expand in the furniture category, supported by LTL freight shipping, and we have launched personal luxury categories such as handbags, sunglasses and watches. In addition, we have recently launched a micro site focused on electronics with many additional sites in the works to have a greater reach than the single FlexShopper.com marketplace site.

It's important to note that we do not take inventory of any products offered on our websites. We have developed strategic relationships with distributors and manufacturers who drop-ship products directly to customers. We believe this provides us with a competitive advantage by eliminating inventory risks and reducing the capital requirements of our business. This, in turn, allows us to invest capital to support our technology road map, marketing programs and loan and lease growth.

In addition to our direct-to-consumer offerings, we continue to add retail partnerships with regional and national retailers. We believe our financing solutions and technology capabilities offer retail partners with a seamless opportunity to add incremental sales to their business. As a result, since the end of Q1 2024, the number of retail storefronts has increased by 150 by the end of the second quarter. Additionally, we expect 500 incremental retail storefronts will launch in the second half of 2024.

As you can see, we have a very robust and active pipeline of new potential enterprise-level partnerships that are being discussed as other similar payment providers tightened their lending requirements. As you can see in our financials, marketing spend was up 71% versus the same quarter in 2023, reflecting strategic investments to ramp up marketing and grow total FlexShopper fundings as well as retail revenue.

Total lease funding approvals from this marketing activity and retail partner door expansion has resulted in doubling our total lease funding approvals this quarter versus the same period last year. Marketing strategies underway include product category-specific micro sites, expanding use of AI in customer targeting and outbound credit-tier prospecting to attract a broader mix of credit types to the marketplace.

The final growth objective I'd like to review today is a significant opportunity to increase customer conversion. Over the past 12 months, our conversion rate has been under 1% of unique website visitors. We're pursuing multiple strategies to enhance our conversion, which we believe provides us with the opportunity to significantly grow our revenue, especially with higher year-over-year funding approval levels. This will be in large part driven by expansion of payment solutions available to our customers.

Looking at the retail lending environment in more detail, our non-prime consumer continues to face headwinds from the macroeconomic environment. This has been increased focused on enhancements to our risk-based pricing to balance the cost to the consumer versus optimizing consumer engagements. This has required significant enhancements to our fraud algorithms in order to grow a portfolio that produces the correct level of asset returns.

As JD will discuss in more detail, our prudent focus on risk management and pricing has created a stable and healthy portfolio that we believe will allow us to gain market share as other lenders and LTO providers continue to tighten standards. As you can see, our efforts over the past year to transform FlexShopper producing strong growth and increased levels of profitability. FlexShopper is supported by market-leading payment solutions and best-in-class technology capabilities, which are protected by multiple patents and pending patents.

In addition, we have a strong and experienced team of associates that are committed to creating value for our customers, partners and shareholders. We believe we have created a unique, asset-light and defensible business model. I'm excited by the direction FlexShopper is headed.

With this overview, I'll hand the call over to John Davis to dive into the company's second quarter performance.

[John Davis, executive]

Thanks, Russ.

As I've stated on prior calls, our long-term plan for our lease business consists of 3 key items. First, we want to improve overall asset quality from the more challenging time periods where removal of government stimulus reduced savings and higher consumer price inflation caused a deterioration in paying performance. Second, we want to continue to roll out our online retail strategy where we realized product margin revenue on the products we sell in our FlexShopper.com marketplace. And third, we want to take these quality originations and grow them.

A strong second quarter revenue growth and a significant improvement in profitability demonstrates the progress we are making executing against these strategies. On asset quality, the provision for doubtful accounts as a percentage of gross lease billings and fees was 22.5% in Q2 of 2024. This compares to 33.4% in Q2 of 2023, which is over a 1,000 basis point improvement or 32.6% reduction year-over-year.

Improved asset quality drove a $3.7 million benefit in the second quarter provision compared to the same period last year. New originations continue to demonstrate favorable early payment performance versus the same period last year, which suggests the provision level should continue its year-over-year favorability, absent any unforeseen short-term macroeconomic impacts.

Regarding our online retail strategy, we continue to realize the benefits of introducing product margin to our business, enabled by our FlexShopper.com marketplace. Our depreciation and impairment of lease merchandise costs as a percentage of gross lease billings and fees continues to improve and was 39.9% in Q2 of 2024 compared to 44.6% in the same quarter last year. The $636,000 year-over-year benefit in depreciation and impairment of lease revenue cost was driven by product margin on goods sold that is recognized over the term of the lease.

In addition, I am pleased to report that our second quarter gross profit expanded 90% year-over-year. This produced a 50% gross margin in Q2 2024 compared to 34% in Q2 2023. The significant growth in gross profit and gross margin is a direct result of the strategies we are pursuing to capture retail revenue and margin.

We now offer multiple payment solutions on our marketplace. It provides more options for customers to transact on the marketplace with an offer that fits their credit profile than what they can obtain from another credit provider. We are working to expand this panel of payment providers to attract a broader range of customers that should increase interest and subsequently sales on FlexShopper.com.

We are planning on adding a large prime credit issuer later this year, in time for the Q4 holiday season, and are working on specific partners to fill in multiple segments of our credit stack. Our performance during the second quarter continues to show positive trends and improving levels of profitability. As a result, we continue to strategically invest in the opportunities to drive revenue growth while maintaining robust asset quality.

FlexShopper lease origination dollars grew again year-over-year in Q2, which is driven both by expanded marketplace activity in our marketplace as well as growth within our partnership point-of-sale channel. We launched a new partnership in Q1 within the tire space, and this rollout is running ahead of our expectations. We have a growing pipeline of new potential partnerships and expect that this is an additional tailwind for origination growth over the coming quarters.

Total lease funding approvals were 102.2% higher year-over-year at $74.8 million in Q2 2024 versus $37.0 million in Q2 of 2023. First half lease funding approvals were 69.9% higher year-over-year. So the rate of higher lease funding approvals growth accelerated in Q2 versus Q1. Net revenue for our state-licensed loan business declined 10% year-over-year as we focus on profitability and managing risk in this business.

Additionally, we have seen better-than-expected collections on our bank partner loan portfolio, which resulted in 223% higher loan net revenue from an increased fair value assumption in purchasing the partnership interest from our bank partner. We stopped originating new loans into this portfolio last year since our bank partner chose to exit the high APR business. However, we are actively pursuing a new bank partner to bring this back to our list of options to better serve our retail partners and customers.

The combined results of these activities produced a material increase in adjusted EBITDA, which expanded from $297,000 in Q2 of 2023 to $4.9 million in Q2 of 2024. As a percentage of total revenue, our adjusted EBITDA margin was 15.5% compared to 1.2% for the same period last year. We believe the strategies we are pursuing, combined with favorable asset quality, will be supportive of our adjusted EBITDA margin for the remainder of 2024.

Our strategic plan remains in place, which is to continue to grow our lease and loan business with favorable asset performance that we are seeing and expand on the online retail opportunity that is in front of us. We will remain vigilant in regards to signs of any potential future economic slowdown, but we continue to see customer interest in shopping within our channels, the continued job growth and low unemployment rates as well as stabilizing consumer prices.

I want to thank our team for the hard work and results and look forward to what we can achieve in 2024 and beyond. With that, let me turn the call over to our operator for any questions that we may have.

[Operator]

[Operator Instructions] And your first question comes from the line of Scott Buck of H.C. Wainwright.

[Scott Buck, analyst]

I think total lease funding approvals is a new metric you're providing. Can you give just a little bit of color on why the change from total funding? And then if possible, what were actual fundings in the quarter?

[Harold Heiser, executive]

Sure, Scott. So give me a second to compile actual fundings. But in terms of switching the metric, given that a lot of our customers are getting approvals and then essentially using -- maybe not be using it immediately, but using it over time, I think it was important to make it clear that we're putting a lot of approvals out there and then it's a matter of just when those consumers decide to convert.

[Scott Buck, analyst]

Okay. That makes sense, Russ. And is it possible to get an update on what's going on with the micro sites, kind of where you are with that process and rollouts?

[John Davis, executive]

Sure. This is John. So we are live with our first micro site, which focuses on gaming and electronics. And we've invested in some technology that allows us to leverage our back-end infrastructure on fulfillment and accessing our various product catalogs. And the plan is to launch another 2 micro sites in different categories by the end of this year, before the holiday season.

So generally, what we're trying to do with the micro-site strategy is to be more specific in a category to be able to provide more focused content, which then gives us better marketing efficiency, better relevance when it comes to online searching and a bit more information for customers that might be a bit more specific to the category versus our generic FlexShopper marketplace.

[Scott Buck, analyst]

Great. That's helpful, JD. And then last one for me. With the 500 potential new retail locations set for the second half of this year, can you remind us what it typically takes for a new location to mature or actually start generating meaningful volume?

[John Davis, executive]

Yes. When it comes to getting those locations online, our technology is such that it can be then a couple of days to get it set up. Then it's all about training for the local operators of the business, which we have a couple of different models. We have virtual training that we can push out to stores. We have a team that will go out and do store visits to be able to support that. And then really, the acceptance of the new program is really then kind of dependent on that partnership between the local operator and our team.

And as I mentioned in the comments that we had, the prepared statement, the partner that we just launched in the tire space has exceeded expectations in generating originations growth. And that's because the leadership team on our partner side has been very engaged and can see the value that this program creates, which serves an underserved credit customer and provides our retail partners with a fairly easy way of generating same-store sale comps. So it really kind of depends on the leadership on the other side, but we've gotten our process down so that it's really customizable for the partners' needs.

[Harold Heiser, executive]

I think a good metric to think through it, the 580 stores that were launched at the very tail end of 1Q, early 2Q that we discussed on the last call, within 60 days, they had approximately 80% active rate, meaning that a store completed a lease. So as JD mentioned, it's really about how management engages with the product and pushes their store employees to use it.

But it seems like we continue, over the last 1.5 years, we continue to see more and more engagement as people understand the value proposition to -- with their consumers and obviously to the retailer itself. And we just continue to see it outperforming historical norms.

[Scott Buck, analyst]

Okay. And what is the cadence in the second half of the rollout? I mean are they back-end weighted? Or I guess, I'm just trying to figure out how I think about contribution for the second half of this year or is it more 2025?

[Harold Heiser, executive]

No, I think the best way to think through it is that most of the retailers don't want to do much between the, we'll say, Halloween to New Year. So think about all of them kind of before the middle of October.

[Operator]

Your next question comes from the line of Michael Diana of Maxim Group.

[Michael Diana, analyst]

Russ, so my main question was also about your new metric, lease funding approvals. So I heard your explanation, which is very good. What's your experience been in your customers actually using the approvals to engage?

[Harold Heiser, executive]

It's -- there's a lot of seasonality involved in it, Michael, in terms of back-to-school, the Memorial, Labor days. Obviously, the end-of-the-year holidays tend to be when a lot of the engagement takes place. And we view it as a demand backlog, and it's difficult to understand exactly when it will take place.

But over time, we feel like we end up seeing -- based upon product sets, obviously, tires and what we think of as more need-to-have items tend to have a much higher take rate, closer to 75%. When it comes to consumer electronics and others, it can dip as low as 30%. But it's more important to just give this marker out there so people understand that we are consistently soliciting new customers, handing out approvals. It's really up to the customer and their life cycle as to when they transact.

[Michael Diana, analyst]

Right. And what's the time period of the approval?

[Harold Heiser, executive]

It typically has been as short of 90 days, historically, but with some of our underwriting changes, we're extending that out now, understanding that the consumer in this environment is not quite going through some of the ups and downs that were experienced over the past few years.

[Michael Diana, analyst]

Okay. And then on your retail partner locations, do I have it right that you added about 500 in the first half of the year and you expect to add another 500 in the second half or maybe double the count?

[Harold Heiser, executive]

Sure, of course. I think it was 580 from the rollout that was the end of 1Q, beginning of 2Q. There was additional 150 that rolled out in June. And then the sort of the low end of expectations for the second half of the year is the 500 that are slated to roll out.

[Michael Diana, analyst]

Okay. And remind me, what will the total locations be with the 500?

[Harold Heiser, executive]

I think total with the 500, we'll end up close to just short of 5,000.

[Michael Diana, analyst]

Okay. Great. Okay. So you added like 25% or more than that in the past, will have added in the past in 2024?

[Harold Heiser, executive]

Correct.

[Operator]

There are no more questions. I will now turn the conference back over to CEO, Russ Heiser, for closing remarks.

[Harold Heiser, executive]

We appreciate everyone dialing in this morning. I want to thank the team here at FlexShopper for all their hard work over the past quarter, which is evident by our results, and we look forward to another great quarter.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.