Q3 2020 FlexShopper Inc Earnings Call

At this time all participants are in a listen only mode. A question and that's just a short follow the presentation <unk> Operatorship to turn the conference. Please press Star Zero on your telephone keypad. Please note. This conference is being recorded I would now like turn the conference over to your host Jeremy almost exactly. Thank you you may begin.

Thank you operator I.

I would like to remind everyone that we've posted an updated investor presentation within the IR section of the company website Www Dot select shopper dot com.

Urge everyone to review the forward looking statement on page two of the presentation with that I would like to turn the polymer flood shopper CEO, which house. Please go ahead rich.

Thank you Jeremy and welcome everyone to our earnings call.

Joining me today is Russ heizer, our CFO inbred Bernstein, the founder and president of flush out there.

This morning, Russ will be expanding all the key financial aspects of our quarterly results and.

Brad will provide an update on our business to business partnership operations.

I will conclude with a summary of our current strategy and a few other key points.

Prior to handing the call over to Russ I would like to highlight some of the key points regarding our business in the third quarter.

Most importantly, our credit quality continues to be favorable.

This result has been particularly important as the government financial stimulus.

Which was prevalent earlier in the year has certainly diminished.

You may recall from last two earnings calls.

We have tightened our underwriting standards at a precaution against potential unfavorable economic activity.

However, we also continue to test across the credit spectrum in a prudent manner.

As a result of that continue testing I'm happy to report, we were able to significantly accelerate our marketing beginning in mid August.

We are seeing very robust levels of growth in our lease volume, which is the key driver of our future profitability.

Russ will provide more detail around this growth in his comments.

Our online B to C marketplace Flexshopper Dot com has operated even better than we anticipated in the third quarter.

We attribute this improved performance through a combination of three events.

The general shifting consumer preference for E commerce.

The continuing improvement in the sophistication of our digital marketing algorithms.

And the expansion of marketing investments in new digitally based marketing channels from sources that we had only been testing in the past.

The combination of these three factors enabled us to enjoy significant leaks the volume growth in August and September.

We believe that growth in the direct to consumer channel will continue moving forward.

With respect to our retail partnership business. It was recovering in the third quarter from the second quarter slowed down that occurred due to shelter spikes in place restrictions.

Fortunately, we added the Newport or that was focused on E commerce solutions and that made up for much of the relatively lighter volume with our brick and mortar customers.

Well add some more color on this line of business later in the call.

Now I will hand over the call to Ross to discuss the financial highlights.

Thanks Rich.

I want to start with a reminder, that we have posted an updated investor deck on our website investor deck has some additional details, which we think are helpful. In understanding our business and together with our press release and 10-Q provides significant insight into our third quarter operating performance.

Adding to Richard's opening comments regarding our market testing and subsequent business activity. It's important to note that flexshopper has years of customer data, enabling us to perform detailed analytics upon which we base our operations. Furthermore, the vast majority of our customers pay weekly, enabling us to obtain quick feedback on their performance.

This combination of a bunch of historical data in short feedback cycle served us well during the pandemic endemic allowing us to make informed decisions quickly.

You too.

And into early Q3, the test data demonstrated even our lower scoring customers and therefore likely the riskiest customers. We're performing however in an abundance of caution we wait a few more weeks to observe performance. After the curtailing of enhanced unemployment benefits before returning to pre cobot approval rates in mid August.

At the same time that we opened up approval rates, we increased our BDC marketing expense.

Digital marketing has become a core competency of flex shopper over the last year is a key aspect of our business and the tool, which we think we use very efficiently as evidenced by our average customer acquisition cost staying relatively flat despite increased marketing expenditures.

The combination of returning to pre cobot approval rates and disciplined the marketing spending in the last six weeks of the third quarter led to a significant increase in lease originations with September becoming the high the highest non holiday origination month for the BDC channel in company history.

Overall, our third quarter gross origination volume was up 33% to 22.7 million over the same quarter last year.

Underpinning that was the increase of 30% in the leases to over 47000, and a modest increase of 2.5% in the average origination value to $480 those.

Those of you who have followed us for some time will understand that current period originations are highly predictive when it comes to forecasting revenues or ensuing year since we recognize the lease revenue over the term of the lease.

In addition, I want to also highlight the net lease merchandise line on our balance sheet the.

The lease merchandise line represents actual merchandise that has been leased by customers net of accumulated depreciation and any impairments. This is a good representation of the size of the performing lease portfolio and as such is also highly correlated with forward 12 month revenue and gross profit we have added a page or investor presentation this quarter showing at least.

Merchandise over time.

As that data shows due to a combination of decreases in b to b originations caused by cobot and the prudent approach to BDC marketing spend in underwriting that we've discussed since the end of Q1, the lease portfolio didn't grow as much as we would have liked from mid March until mid August.

That was a temporary lull, though as I mentioned in the last six weeks of the quarter were terrific for the BDC or Flexshopper dot com portion of the business and the B to B segment rebounded well as Brad will cover in more detail.

We ended the third quarter net inventory stood at almost $31 million, which is up 26% from the same time last year positioned this positions us well going into our fourth quarter.

Gross profit margins increased to 36%, which was up nicely from the 30% in the second quarter, which had experienced experienced margin compression due to an increase in early pay off transactions, which we believe are a byproduct of government stimulus.

Third quarter gross margins were relatively consistent with last year's 37%. So we think it is reasonable to conclude that the rate of early pay off transactions has returned to a more normal level at this point.

It could always be impacted again by additional government stimulus.

Marketing expenses 1.7 million in the third quarter, which is a significant increase versus the 900000 from the third quarter 2019.

As I noted our data provided the justification for Onboarding. These new customers as long as it could be done at the appropriate acquisition cost marketing spending is responsible for driving growth in the lease portfolio in the short term and the long term is what gross revenue and gross profit.

New customer acquisition costs for the quarter came in at $77. This is about 13% lower than last quarter. In addition, the new customer acquisition cost for both B to C. N b to b individually lower comparable to the first quarter of the year. However, the mix of customers by channel have in the first quarter as a result of the cobot environments.

EBITDA was 2.1 million for the third quarter compared to $3.2 million in the third quarter 2018, the largest item driving this year over year change in EBITDA was the marketing expense increase of approximately 800000, which I previously noted.

Other additional upfront variable cost associated with new originations is the underwriting cost. This is the data that is purchased examined on each consumer as part of the underwriting decision that cost us approximately $300000 higher in this quarter versus a year ago as a result of the growth in originations.

Therefore, the 1.1 million difference in EBITDA between periods was all spent on growing the lease.

Now I'll hand, it over to Brad for an update on the ERP business.

Thank you Russ.

Since our last call existing retail partner originations continued to rebound and are closer to pre COVID-19 levels more.

More importantly, the addition of new retail partners and the rebounding and optimizing of existing retail relationships mid September our largest b to b lease origination month since since inception.

So as Russ had mentioned September was our largest b to C lease origination month, we also had our largest speed to be lease origination month in September.

We continue to turn retail prospects into partners with successful adoption of our mobile LTL technology of course different product categories. Thanks.

Examples this last quarter include two regional retailers, one in furniture and another in electronics, they were able to launch quickly with our turnkey mobile app solution.

As most of you know by now our in store payment solutions required no integration with the retailer and are quick and seamless for consumers and store employees.

Our innovative technology at the point of sale and no money down lease to own payment option make our retailer proposition very compelling.

We're also very focused on maximizing existing accounts I'm pleased to share that the E. Commerce account, we spoke on the last call that is currently at an annualized multi million dollar run rate has exceeded our expectations.

In addition, with local field support and collaborative marketing initiatives, we continue to optimize an exciting 23 store pilot that we started in the second quarter. This.

This retailer also diversifies, our category base and sells a variety of merchandise from electronics to bikes to musical instruments.

Theres no doubt that the Cobi crisis has accelerated adoption of ecommerce. So we're very focused on marketing our seamless online lease to own payment method to check out the E commerce sites and.

Another beneficiary of ongoing acceleration is flex shopper dot com, which makes flex shoppers omni channel offering more compelling than ever to retailers looking to broaden their customer base and increased sales with consumers shorten a cash and credit.

We currently are the only virtual lease don't provider that has this omni channel ecosystem comprised of an online marketplace lease to own ecommerce payment method and in store LTL payment solution for retailers and consumers.

We're very bullish about our pipeline and excited about our product offering as we continue to penetrate.

Significant virtual lease to own market opportunity.

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

Thank you Brett.

Since I arrived to the company a little over a year ago, we have emphasized our core priorities, which are underwriting liquidity in distribution.

In good times and bad these elements enable us to maximize our return on shareholder capital.

Although the COVID-19 phenomenon slowed us down some we can now add growth to the topics, we would like to discuss moving forward.

Looking back over the period from beginning of the year till now.

We have not seen any degradation in our credit quality.

Additionally, we are far more confident with the breadth of our marketing sources, Inc.

You can see a clear path of growing our direct to consumer business.

Finally.

We were having the success of our retail partnership where b to B channel.

And we anticipate growth there as well.

In addition to our marketing success in obtaining new consumers.

Importantly, we continue to see improvement in our repeat lease volumes.

We believe this is due to a combination of better underwriting which of course gives us more consumers to market do over time and this national sophistication in the segmentation and stimulation of our existing customer base.

Earlier, Russ pointed out a couple of key metrics to observe when looking at our future earnings outlook.

In the long term is going to be the net lease merchandise level.

Which has increased by 24.6% year over year.

In the shorter term, there's always a bit of an earnings drag based on our marketing investments.

That is to say the media expenses associated with marketing and underwriting offset the revenues provided by leases generated in previous periods.

The good news is that over time, the larger the net lease merchandise level of the company. There was less of an earnings drag based on marketing investments. This was due to the earnings power of this created by higher inventory levels.

Higher sustained net lease merchandise levels is what drives the scalability of the company and we believe we have now established a platform to achieve scalable and profitable growth moving forward.

Of course, we continue to operate in a tumultuous economic and political environment.

While we are pleased with where we are currently with respect to our risk in marketing initiatives.

It's still difficult to have long term visibility with U.S. economy.

I am certainly not no more qualified than anyone else to predict there will be another surgeon COVID-19 cases.

If there will be a nother national shelter in place initiative.

Or if there will be further government stimulus payments for consumers.

However, we are more confident in how we can respond to any of these events now.

Another shelter in place initiative will obviously slow our brick and mortar retail partnership business.

On the other hand based on the hearing if we've had over the last eight months.

Oh, well continuing to aggressively invest in marketing and our online and ecommerce partnership channels.

Another stimulus package is probably April before our business. We have seen it is not necessary for us to establish the appropriate returns our investigation.

That concludes our prepared remarks, and we're happy to take your questions at this time.

At this time, we'll be conducting a question answer session. If you would what does a question. Please press star one.

You bet.

Information so indicate your line is in the question queue you.

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One moment, please as we pull for questions.

Our first question comes the line of Michael Diana with Maxim Group. Please proceed with your question.

Hi.

Brad mentioned a.

23 store pilot program.

You start in the second quarter did that contribute in the third quarter or is that or is the main contribution still yet to come.

Right I'll, let you handle that.

Yes, Mike how are you.

That.

It did contribute in the third quarter, yes.

Okay, good, but but not.

To its full extent or.

No. It was it was very small contribution as it was part of the pilot program.

We are looking forward to that increase it over time, but it was.

Actually contributing but at a very small level okay, great. Thank you.

And once again, if you look just a question. Please press star one on your telephone keypad. Once again, if you look just a question. Please press star one on your telephone keypad one moment. Please.

There seems to be no further questions left in the queue and with that I would like to turn the call back over to rich house for any closing remarks.

Well. Thank you everyone for joining us and we will look forward to speaking with you again at our year end earnings call and thank you again for joining.

This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

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