Q1 2020 Earnings Call

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Greetings and welcome to the Flex shopper first quarter 2020 earnings call.

At this time, all participants are in listen only mode.

Question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.

I'll now turn the conference over to our hosts.

Jeremy Hellman of the equity group. Thank you you may begin.

Thank you operator.

I'd like to remind everyone that we have posted an updated investor presentation within the IR section of the company website Www Dot Flexshopper dot com.

Thank you everyone review the forward looking statement on page two of that presentation with that I would like to turn the call over to flex sharper CEO Rich Josh. Please go ahead rich.

Thank you Jeremy.

And welcome everyone to our 2021st quarter earnings call.

Joining me today, it's Russ highlighted our CFO.

Red Bernstein, the founder and president of Flexshopper.

Well, that's going to walk you through result for our business, including financial details.

The brands going to provide you an update on our business to business partnership operations.

Well, that's also going to provide some detail on how we mobilized our operations to effectively conducting business in the pick up at night things business environment.

I will conclude with a more detailed discussion of our view a credit risk.

Our direct consumer marketing activities.

In summary of our current strategy.

However, prior to turn the call over right. So we want to make the some brief comments regarding the current impact the cobot 19.

Broad based economic slowdown and how it has affected blood chopper.

We entered March with strong growth, which is reflected or at least origination growth of 20.6% year over year for the total quarter.

However that growth slowed substantially the second half of margin throughout April.

This is due to a significant drop of consumers purchasing in our retail partner stores result, resulting from the shelter at home requirements across our geographic footprints.

Also contributing to the slowdown.

Lower volume in our direct to consumer marketing in the second half of March based on our decision to prudently tightened our underwriting criteria.

We assess the potential impact of the code would not things slowdown on consumer behavior.

Fortunately, we have not seen any deterioration in consumer payment behavior in March or April.

At the end of the quarter percentage of leases being paid in a timely manner was higher in March of 2020, then in March 2019.

Im a pattern continued as at the end of the Mountain April timely payments were higher in April 2020, NAND, Both April 2019 and market 2020.

While it is certainly difficult to see the future.

We are happy our credit quality has remained strong for Dave.

Now I'll hand, the call over the rest now that we've got the financial highlights.

Thanks, Rich I press released Investor deck on our website provides significant detailing the first quarter and trailing 12 months. So I'll focus on a few high level metrics and a few key items.

As a reminder, due to the seasonality of our business. The best metrics are ones that compare cross similar time periods.

Therefore, we originated over 36000 gross leases this quarter of 20.6% from the prior year quarter originations or more importantly, the growth in originations is the best indicator of future revenue in revenue growth as we recognize the revenue from new leases over the 12 months following origination.

Net lease revenues in fees were up 8.8% to 23.7 million, which reflects the continued growth in originations from prior periods.

In addition, gross profit improved 16.4% the 8 million the gross profit margin improving to 32% versus 30% for the prior year quarter.

In addition, our average origination value for lease improved from $470 in the first quarter last year at $475 in that first quarter 2020.

The same time, we're able to reduce our average customer acquisition costs from $111. This $68.

Please note that.

It was $84 for the fourth quarter of 2019, so continued improvement on that front.

Moreover, we finalized the warrant exchange this past quarter, there's some cost associated with that exchange. This quarter that we will not have going forward. Moreover, the EPS impact of the deemed dividend relate to the exchange result in additional onetime loss of four cents EPS, which as noted in our income statement.

In addition, as we stayed in our press release last night, I noted length and breadth of the cobot 19 situation and resulted in US withdrawing our previously issued financial guidance for full year 2020.

Now I'll hand, it over to Brad you go into more detail on the BT business.

Thanks Ross.

First I'd like to address our response to cope with 19.

As a company headquartered in South, Florida, and subject to Hurricanes, we have a solid DCP or business continuity plan.

It was put to the test our team has done an excellent job and executing today most team members work remotely.

We have continued to maintain high levels of productivity and high levels of customer service.

I'm very pleased to share that operationally, we have been business as usual with additional things toward nimble technology and online model model.

Moving on to be to be as we're all aware retail has been hit hard by Covance and hence has adversely impacted our beat it be originations due to store closures and reduced traffic. Our tire partners are open as essential businesses, but origination volumes are significantly less.

On a positive note we've seen our retail partners internally stress the importance of using our services to increase sales as primary credit finance companies the Cline more applicants.

We mentioned in our last call that we felt we had a strong pipeline of business and today, we feel justice confident except these initiatives are deferred by retailers until their near term crises our reverted at some level of normalcy is achieved.

We believe that coming out of this retail as demand for our services will be stronger based on increased pressure for sales.

We also believe that the acceleration of online sales that many retailers are experiencing will continue past the cobot crisis, which is why we are heavily marketing our seamless online leased on payment method at checkout to ecommerce sites, we believe that online behavior adopted by consumers. During this period will still.

With many and obviously, we want to capitalize on that.

Overall, we are optimistic that the co would impact on our B to B channel is a deferral of GDP growth and we believe that will come back stronger based on retailers pent up need for sales.

On another note something that Weve touted from the time that we started reflect shopper and is very relevant today is that we are diversified with multiple lease origination channels. So while storefront retail is significantly impacted by coded and influences. Our in store business. We also have our online direct to consumer channel.

Flexshopper Dot com.

This channel, which on our early years generated much of our growth Weve control based on marketing spend.

We are only aware of two other companies in virtual lease to own that have direct to consumer E. Commerce for our observations and do not have the selection brands or national retail Dropship partners that we have.

We feel that as the in store leased to own consumer is displaced and looks to shop online we have a competitive edge with our robust leased to own ecommerce platform.

And now I'd like to turn the call back over to rich.

Thanks, Brett.

I'll remind you that on our fourth quarter conference call, we discussed the fundamentals flexshopper priorities, which our risk underwriting.

Would it be and distribution.

It was elements enable us to maximize the return on shareholders' capital.

What is already explained we are comfortable our liquidity.

And in my experience in a recessionary environment.

Risk underwriting becomes more important than expanded distribution.

Therefore, I'm going to spend a bit of time to explain how we are looking currently at risk management.

As we communicated last quarter, we tightened some underwriting standards upon my arrival in October.

We also can we communicated in that call. We spent the rest of the fourth quarter of do not thousand night being developing improved algorithms and anticipated moving back to a more rapid growth rate beginning in the first quarter appointing.

Indeed, we were growing at a rapid rate through the first 10 weeks of the first quarter in our improved algorithms enabled us to do that.

With an appropriate level of credit risk and the appropriate return on capital deployed.

With the sudden change in the economic environment associated with overnight team once again moved to a tighter underwriting strategy using our improved algorithms.

In a normal environment. This would indicate we are booking a much higher quality leased asset at a lower volume.

However is not clear how much this may change it varies extended slowdown in the economy associated with the cobot 19 shelter in place policies.

With respect to future credit risk I gain comfort from the you know algorithms and the tightened underwriting standards.

Additionally, a gain comfort from the type of product offer.

Offering that we provide to consumers.

We lease products and not cash as makes the asset more stable as it cannot be immediately used to pay off another loan or to create immediate liquidity for consumer.

In other words, our customers are actively shopping for a product they desire and it has value for them.

Our average order value is $475, which is relatively small.

Leases have a short term life of 52 weeks.

We collect payments directly from consumers banking accounts on a weekly basis, which results in a relatively small payment from a consumer in any one point in time, our average weekly payment required is less than $20.

Importantly.

This weekly payment pattern also gives us a very quick read on changing consumer behavior and enables us to adjust underwriting strategies very quickly.

In summary, I'm very comfortable with the advance Decisioning technology Flexshopper uses were underwriting.

Additionally, comforted by the profile of this small ticket hi payment rate asset in a more challenging economic environment.

Now regarding the distribution of our assets or marketing.

We are obviously looking forward to our retail partners increasing their volume as shelter in place restrictions are lifted overtime. However, we have no control over this timing or how quickly their consumers will return to purchasing.

Speed at which our retail partners volume returns to a normalized volume is probably our biggest unknown in our outlook for the immediate future.

Brad mentioned, we have active dialogues with all of our existing and potential partners.

We believe this retail volume will normalize and grow we do not have the exact timing of this retail acceleration.

Of course, we do have control over our direct to consumer marketing. We're pleased with results we had in the first quarter.

We continue to actively originate new customer leases at an attractive cost per customer and they continue to perform well.

We're currently evaluating when we would like to Reaccelerate, our direct to consumer offerings.

Additionally, we have shifted a substantial portion of our marketing investments to stimulating our existing and former customers in order to increase the let their leasing activity with flood shopper.

Returning customers are our most profitable segment of consumers and we definitely want to take care of their needs.

Particularly since their availability of credit from other credit providers has likely decreased in the past couple of months, we will probably remain suppressed over at least the next several months.

We are searching for the right time to accelerate flex shoppers growth rate. However, in the very near term, we're going to err on the side of caution and continue to market to consumers in a prudent manner with tightened underwriting standards.

With that said, we're happy to take any questions.

Thank you.

At this time, we will conduct our question and answer session. If you would like to ask the question. Please press star one on your telephone keypad.

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Our first question comes from your door O'neill with Ascendiant capital markets. Please state your question.

Q.

Hey, thanks, Thanks for all that helpful detail on.

The average weekly payment was very interesting.

Do you have do you have a view on what percentage of your of your customers had to close their doors and Tom can you comment on sort of that your geographic footprint. It relative to the 40 or so states that are going to.

Try to get back to business now do you have a.

Footprint there separate from they say that footprint of Connecticut, or New York, where we're still in lock down.

Yes, so I'll kind of broadly answer your questions.

So when it comes to no tires, where we've had.

Our model has worked really well in that vertical.

In considered a central businesses, so there's still operating.

But obviously the impact there is reduced traffic.

What we've seen no as regards to category like furniture is that many of those have actually close.

You know as far as you know geographic concentrations.

Basically.

Our business kind of follows the most populous states.

But obviously you know.

Our retail locations up in the northeast are are slightly more impacted Fortunately again.

There we have a lot of tire stores and they are considered essential services. So.

I guess I another way to.

Try to answer that question and tell us if we know.

On the business consumer side, we have.

A national presence and generally distributes as a national.

Population does.

On the on the business to business sided brand was saying we do have some geographic we don't have geographic restrictions. We just have partners that are focused geographically, we do have some concentration.

And some of the states like New York, which would you know even though they're open their stores are open the traffic is way down correct correct.

Okay. Thanks, very much very helpful.

Sure.

Thank you.

There might have thought the question press star one on your telephone keypad.

Our next question comes from.

Steve Emerson with Emerson investment group. Please state your question.

Congratulations on your very approved man, but.

We have any kind of flavor as to.

What proportion of our Oh worse or we're encouraged our in.

Or per organization set are completely shut down like restaurants hotels etcetera.

Or risk in terms of.

Employment.

Well, we do not.

Capture that data on on.

And our underwriting.

[music].

So we do not have a a figure for you there Steve.

We I guess, the best way too.

Express how this is working is we do have.

Customer base, it's continuing to pay us.

And they are continuing and we're not having any upticks and our.

Working sessions, where consumers as ethnic I think we said in previous calls.

When we have a part of our collection efforts as we want to keep consumers in their leases right. We want them to get the lease that they the the product they leased from us and eventually want to own.

So we have a a kind of will work out process with these people we have not seen an increase in that either.

So.

I can't answer your question, because we don't capture that data.

But I can just say that the.

To date through through the end of April in the first few days or May we've just not seen any deterioration in performance that would indicate that they cannot pass.

That's excellent thank you.

Thank you.

Thank you.

Okay.

Next question comes from Scott Buck with B. Riley. Please state your question.

Hey, good morning, guys. Thank you for taking my question I'm curious on the direct to consumer business, whether you've seen a shift in the.

Items that are are being purchased or rented whether it skews more towards a work from home more home schooling.

Perspective, and then whether or not so much larger ticket items like computers, and maybe furniture now you guys.

A little better margin on.

Well it we did some analysis on that and we've always had a nice gaming business. If you will in our marketplace, our direct to consumer marketplace, It's like shopper dotcom.

And that has remained very strong, but we've also seen a.

Pretty big uptick in laptops and Pcs.

Which we don't know for sure, but I can probably attribute that to a little more home schooling that has to happen or work from home environments, but we've definitely seen an uptick in those electronics.

We are we're not taking them the margin we know as you may know right. We don't have the inventory. So we're not that's not a margin for us we're making our money primarily on the lease itself. So we're not particularly concerned with with what item gives leased.

But we do we figured that that would be a questions are people, who want to know, but yes, we're definitely seeing.

A skew towards more of the electronic side of things.

At home.

Great. Thank you guys.

Thank you that concludes our question and answer session I'll now turn it back to management for closing remarks.

Yes.

Oh.

Thank you for joining us today, we look forward to speaking, we JV again on our second quarter earnings call.

Thank you. This concludes todays conference all parties may disconnect have a good day.