Q1 2021 FlexShopper Inc Earnings Call

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Greetings and welcome to Flex Shopper Q1, 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference.

Recorded I would now like to turn the conference over to Mr. Jeremy Hellman of the equity group. Please proceed sir.

Thank you operator, I would like to remind everyone that we have posted an updated investor presentation within the IR section of the company website Www Dot <unk> dot com and encourage everyone to review the forward looking statement on page two of the presentation.

I would like to turn it over to flex shopper CEO Rich House. Please go ahead rich.

Thank you Jeremy and welcome everyone to our earnings call.

Good day, as our CFO Russ heiser.

This morning, Russ will be expanding on the key financial aspects of our quarterly results and I'll cover our operational highlights.

Using a sports analogy, our first quarter can be summed up as one where we ran the play we called.

We were able to grow the company revenue and EBITDA substantially by continuing to execute our proven digital marketing strategies as well as increasing our retail footprint and associated retail lease volume.

As our peers have also noted on their earnings report the main storyline for our industry has been the impact from government stimulus programs.

We have maintained the position that stimulus is a modest positive for our business. When all is said and done.

However, there is an inter temporal effect associated with the effects of the stimulus program.

I'm wondering on immediate basis stimulus impacts our business in two countervailing ways.

First we tend to see more of our delinquent customers make payments and this is a good thing of course.

Well the other hand, we also see a number also see a number of our customers pay off their leases early those early payments reduced the overall return on each of those leases.

Looking a little longer term the capital we receive in the form of those early payoffs can be recycled into new leases and.

And with digital marketing costs remaining at levels, we found attractive during the quarter recycling our capital enables us to grow our book of business.

Additionally, on the longer term stable. This helps our customers have a better personal balance sheet.

Resulting in better future payment behavior.

Our ideal scenario is having those customers that paid off their leases early become repeat customers. As we have noted regularly repeat customers are our most profitable due to the associated low customer acquisition cost and better payment behavior.

As Youll recall, our retail partner business was more impacted by the pandemic than our online marketplace.

Notwithstanding the slow down of our retail partner business due to COVID-19, we are happy to report net line of business is rebounding in the first quarter at least volume increased 19% year over year.

I think it's also important to note the recent stimulus package.

Passed by the Federal government was the third round of stimulus and.

And over the course of the first two rounds, we were able to produce and analyze a significant amount of data.

Pointing our current underwriting and marketing strategies.

We have seen a rebound in demand after past stimulus payments have diminished and we expect that to be the case later in 2021.

I'm going to turn the call over to Russ now to address the specific items regarding our financial performance.

Thanks Rich.

Want to start with a reminder, that we have posted an updated investor deck on our website.

That deck, we have several data points, including new and repeat lease volume by origination channel they're useful in monitoring our performance.

We have broken out a number of operating and financial metrics by year. So that the relationship between prior year originations and current year revenue and gross profit profit is evident.

In that presentation. We have also included pre marketing EBITDA, which we think provides another window into how our business is performing.

Marketing expenses are primary growth lever and largest variable cost there is a quite a bit during the year in response to both seasonal consumer activity along with external factors. Therefore, moving it from the EBITDA calculation is informative when looking at the business over time, especially as marketing expense would be expected to continue to increase.

The investor deck together with our press release, and 10-Q provide significant insight into our first quarter operating performance.

So I've mentioned previously there are two metrics, which are highly predictive when it comes to forecasting revenue and gross profit for the ensuing year.

First as trailing 12 months of originations since we recognized the lease revenue over the term of the lease.

In the first quarter originations were up 21, 5% on a dollar value basis that was a function of both the lease count increasing by eight 7% year over year and average order value increasing to $532 from $475.

The second predictive metric is lease merchandise, which represents the value of goods that had been leased by consumers net of accumulated depreciation and any impairments. This is a good proxy for the size of the performing lease portfolio and as such is also highly correlated with forward 12 month revenue and gross profit.

Our net lease merchandise balance at the end of the first quarter was $39 3 million, which is up 31, 4% from the prior year.

For those of you looking at the balance sequentially. It is normal to expect Q1 default somewhat from Q4, given the seasonality in our originations which peaked in the fourth quarter.

Customers make payments on the leases originated in Q4 and net lease merchandise balance will go down.

It's offset to a degree a new leases originated in the first quarter, but with Q1 originations below that of Q4. The net result is a dip in the net lease merchandise balance however.

But that dip was accentuated by what was a significant increase in the percentage of early payoff transactions over what we've seen historically, we believe this is a byproduct of government stimulus.

Impact of stimulus can also be seen in the dip in gross profit margins first quarter gross profit margin was 31% compared to 32% in the prior year as a result of these unusual early payoff transactions.

The company's largest variable cost as marketing expense.

And he is responsible for our growth in new customers and overtime are repeat customers and we will continue to spend as much as we can at the appropriate acquisition cost.

Marketing expenses $1 8 million in the first quarter, which is a significant increase versus the $1 million from the first quarter of 2020.

The main driver of this increase in marketing expense was the availability of digital marketing opportunities at levels, where we can acquire customers at or below our targeted acquisition cost for the quarter average customer acquisition cost was $82.

EBITDA was $2 4 million for the first quarter compared to $2 million in the first quarter of 2020. So we're off to a great start for the year with that I'll hand, the call back over to rich.

Thanks Ross.

By all accounts the first quarter was a quiet one of steady execution.

Our customers are generally in good shape financially so thats a positive for our credit quality.

Our payment performance as measured by cash received as a percentage of mill leases was higher than any other quarterly period in 2019 and 2020.

Even with the improved personal balance sheets, we are still seeing solid demand for our lease to own offerings as our appears on the industry.

I think that is primarily a function of the low weekly pay you on a customer enjoys with floods shopper, which is more appealing than seeing several hundred dollars leave their bank account on one job.

Before opening the call to your questions I want to spend a moment discussing our retail partner or business to business <unk> business.

Last quarter.

We noted that a pilot program with a national retailer was set that span from one state before.

Net rollout, which occurred in March and April time frame has been successful and we will now and over 300 storefronts with this partner.

We continue to receive positive feedback from this retail partner in it.

And expect to expand our relationship to include additional states over the.

Of course of 2021.

We're optimistic this partnership will accelerate our lease volume growth for the second half of 2021 and beyond.

We are also busy working to secure additional <unk> partners with a number of active discussions working their way towards powerless pellet agreements.

As COVID-19 restrictions continue to be lifted we expect these discussions to accelerate.

In conclusion, our strategy is to continue to focus on the long term growth of high quality assets, which will drive long term profitability.

We plan on continuing to invest our excess cash into our marketing efforts to maximize this long term opportunity.

As always we continue to emphasize our core priorities, which are underwriting liquidity and distribution.

Irrespective of macro economic events, those elements enable us to maximize our return on shareholders' capital.

That concludes our prepared remarks, and we're happy to take any questions.

Thank you at this time, we will conduct a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.

Formation tone will indicate your line is on the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing this darkies one moment, while we poll for our first question.

Our first question comes from Scott Buck with H C. Wainwright. Please proceed.

Hey, good morning, guys.

I'm curious could you talk in absolute terms or maybe in percentage terms. The difference in early pay downs during the first quarter of this year versus the year ago period.

Sure. So we typically think of early payoffs.

Pay offs accelerating in the first quarter of each year as we have tax refunds, but typically that results in a <unk>.

Early pay off percentage that's about.

13% to 14% of the portfolio.

And this period was are north of 16%.

Great that's really helpful for us.

Could you help me understand who the incremental borrower is with lease originations up 20% year over year I'm curious.

If you're on your you're reaching a number of new excuse me a number of new customers or customers are taking you know larger leases than they have in the past a combination of both I mean, what what are the kind of moving pieces there.

We believe there is two factors that are occurring one is additional consumers that we're able to.

Target, we are expanding our digital marketing channels, we've had a good.

Good success using.

Technology that will enable us to go to different digital marketing channels that we were not using before so we're finding some incremental customers to drive to our marketplace.

Secondly.

Within our digital marketing place.

Like shopper Dot com, we are using technology that is better able to.

Target, which consumer comes to see us into focus a product offering that is most suitable for them and that we believe is what's driving the increase on our average order value.

Great.

That's helpful and last one on I'm just curious what are the items that are actually driving demand.

You know I think we've kind of clearing moved out a lot of the household stuff that.

Drove lease demand in <unk>.

Spring and summer of last year. So I mean, what are the items now that people are most interest again.

You know our mix as we've talked about in the past has been primarily consumer electronics, we still see consumer electronics as being the.

The driving force in our lease originations.

One of the Scot and Carey will get more into detail with it on the average order value, we feel we see consumers coming in to buy consumer electronics, that's our biggest.

Opportunity right now, but we're also able to use our technology to kind of combine some products. If you will so much.

Much like I'm sure. Many of you shop online Youll see suggestions on what to buy and in addition to what you are initially buying and we've been able to incorporate some of that type of technology.

Suggests.

Tumors.

Other complementary products and that's been successful for us.

Great. That's very helpful guys I appreciate the time.

Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad, one moment as we pull from more questions.

There are no further questions in queue at this time I would like to turn the call back over to management for closing comments.

Yeah.

Well, we'd just like to thank you guys for joining us and have a question coming Q1 moment, let me just double check to make sure.

Okay.

We have a question comes from Ed Woo from <unk> capital. Please proceed.

Yes. Thank you for taking my question. My question is how do you see the shift towards online sales impacting your business and how do you guys manage to continue to grow that business again. It seems to have more consumers are getting more comfortable to focus almost exclusively buying stuff online.

Yeah, we definitely believe that as a tailwind for us we have.

Okay.

A fairly substantial robust online marketplace and as more consumers become comfortable.

Purchasing online that is definitely in our favor.

And that's why we've been able to invest in expanding our digital marketing channels as the typical kind of Google search or Facebook advertising, we've gone to other channels as well.

As consumers are out there looking to shop online and we see that as a positive tailwind for us. So our strategy as we've talked about in previous calls as we have our direct to consumer business, which we're growing at a very healthy rate and we're trying to complement that by.

Supporting not only our retail partners, who have an in store presence, but we're also on our sales team is focused on.

Other retailers, who would like to move into the digital arena, but may not have done that yet and we can use on some of our expertise that we've developed over time, Mark and digitally.

To help them enter into the the.

On the digital space using our expertise and so we think that gives us potentially moving forward some type of competitive advantage as we compete with them with others in the retail space.

Great well, thanks for answering my question.

Thank you once again I'd like to turn the call back to management for closing comments.

Once again, thank you for joining us today, and we'll look to speaking with you on the second quarter call and a few months.

Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.