Q3 2021 Katapult Holdings Inc Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Thank you and good morning, welcome to the capital third quarter 2021 earnings Conference call with me today are Orlando.
Executive Officer, Eric Mendelsohn, Chief operating officer, and Krista keep it up Chief Financial Officer.
We issued our earnings release and presentation. This morning, we will be referencing the journey the call.
Both can be found on the Investor Relations section of our website.
We'll be available for Q&A following today's prepared remarks.
Before we begin I would like to remind everyone. This call will contain forward looking statements regarding future events and our financial performance, including statements regarding our market opportunity the impact of our growth initiatives and our future financial performance. These should be considered in conjunction with cautionary statements contained in our earnings release.
And the Companys Form 10-Q for the quarter ended September 32021.
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.
As required by law, we undertake no obligation to publicly update or revise any of these statements whether as a result of any new information future events or otherwise during today's discussion of our financial performance, we will provide certain financial information that constitute non-GAAP financial measures under SEC.
SEC rules.
These include measures such as adjusted EBITDA adjusted net income.
These non-GAAP financial measures should not be considered replacements for and should be read together with our GAAP results.
Reconciliations to GAAP measures and certain additional information are also included in today's earnings release, which is available on the Investor Relations section of our website.
This call is being recorded and a webcast will be available for replay on the Investor Relations section of our website I will now turn the call over to Orlando.
Thanks, Bill good morning, and thank you for joining us on today's call. We will review our third quarter 2021 results share what we're seeing in the current macro environment and provide an update on how our strategy for sustainable growth within our large addressable market is progressing.
We are confident our highly scalable technology is delivering on our mission of financial inclusion for the non prime consumer.
We see growing evidence of the value and satisfaction that we bring to our customers as well as incremental sales opportunities. We enable for our merchant partners that allow them to reach a very large and underpenetrated market of non prime consumers.
Our long term vision of supporting this underserved segment is coming into sharp focus and we are pleased with our progress on our platforms and partnerships that enable ongoing growth.
Turning to slide five you can see it the addressable market for durable goods E Commerce is already substantial.
As the leading ecommerce financing platform is focused solely on non prime consumers. We believe we are well positioned to capture significant share of durable goods e-commerce market targeting underserved consumers as we continue to grow strategically.
Our proprietary technology platform combined with our sophisticated risk and Decisioning model is designed to allow us to deliver value added solutions to our merchant partners and offer innovative lease financing solutions to underserved non prime consumer.
We pride ourselves on delivering a seamless customer experience with flexible and transparent payment options. Looking ahead, we will deliver incremental opportunities to our customers and merchant communities, bringing more financial possibilities to the non prime consumer.
As you can see from the quarterly highlights on slide six our team continues to execute well in the face of a difficult macro environment.
<unk> spending habits are changing as we begin to emerge from the pandemic with people starting to move about more freely in public spending on services and wants like entertainment and travel has increased however demand for durable goods that are needed on a daily basis remains strong.
In addition, significant supply chain disruptions are creating challenges for our merchant partners to secure inventory and fulfill orders in a timely matter, which is pressuring their sales and consequently, our revenue and gross originations.
In spite of these ongoing macro challenges, we continue to capture market share and added merchant partners with 25, new merchants added in the quarter, bringing our total to 82, new merchants year to date.
Our merchant retention rate also remained strong while our customer satisfaction metrics such as our net promoter score and repeat customers are up significantly year over year.
We expect that after a few more quarters of recovery from the pandemic, we will see a return to more normal macro environment.
Our strong balance sheet with $100 million the cash supports our growth strategy, which includes expanded business development that is driving the addition of new merchants that can be on boarded more quickly.
<unk> investments in new product and technology initiatives setting us up for an exciting year ahead, as we seek to accelerate the growth of our business.
Despite the current macro challenges that are impacting our merchant partners, we are executing well against a challenging sales backdrop, we have established a solid operating foundation from which to execute our longer term growth strategy and believe we are in early stages of building, a large and durable financial service enterprise with dramatic incremental.
Profit opportunities as we scale.
I'll now turn it over to Chris our CFO, who will provide more details on our third quarter performance Teresa.
Thank you Orlando as detailed on slide seven total revenue for the third quarter of 2021 was $71 7 million an increase of 1% year over year revenue year to date reached $229 8 million versus $173 8 million last year, an increase of 32% year over year.
Gross originations were $61 million in the third quarter of 2021 up 1% year over year gross originations year to date are $189 $1 million versus the $175 3 million up 8% year over year.
Orlando highlighted significant supply chain disruptions are creating challenges for our merchant partners to secure inventory and fulfill orders in a timely manner, which leads to lower sales and conversion rates. These headwinds did mute third quarter origination growth of our merchant partners that we believe would have been higher absent the challenging macro environment.
Despite these difficult macro factors, we were able to slightly increase overall gross originations in Q3 as our merchant partners worked through the supply chain disruptions.
Breaking down our Q3 gross originations are.
Our largest market partner reported third quarter U S sales down 21% year over year. However, we actually increased our penetration rate the finance gross originations as a percentage of U S sales with this merchant and our gross originations with that partner were down only 6% year over year.
Our gross originations with our other merchants grew 17% year over year spurred by new merchant adds.
We believe the overall trajectory of our revenue and origination growth accelerate as we continue to add new merchants to healthier baseline of existing credits origination.
And we are optimistic these industry trends will ultimately prove to be transitory, we anticipate supply chain disruptions will continue to create uncertainty for our merchant partners throughout the remainder of 2021.
Given these macro headwinds it remains difficult for us to have sufficient visibility for the balance of the fourth quarter and be in a position to provide guidance at this time as a result, we plan to update you on our fourth quarter progress and the beginning of December after the cyber five period, which is Thanksgiving through cyber Monday, and historically brings in record shoppers and sales for many retailers.
Looking longer term trends in e-commerce sales remaining extremely encouraging.
Our adjusted EBITDA for the third quarter of 2021, it was roughly breakeven at 102000 2000, reflecting three areas of year over year expense increases.
More normalized seasonal lease payment performance to some level of incremental public company costs and three our increased investment in key new hires and growth initiatives, we will dig into each of these categories more specifically, but at a high level. We feel high profit margin profile is poised to grow nicely as we gain economies.
Scale through our growth strategy.
Looking at slide eight the stimulus payments that occur during 2020 and early 2021 in response to Covid, but historically favorable credit performance for Brian and non prime consumers alike.
As we move through 2021, the credit environment is beginning to normalize to pre pandemic pattern.
Our lease payment performance is following that track in both lower early buyout levels and higher write off or.
Our 90 day early purchase option rates have trended down through Q3 and.
Delinquencies for the period increased year over year better stabilizing at pre Covid levels are.
Our third quarter bad debt expenses up compared to a year ago, when the issuance of stimulus checks with historically low delinquency rates.
Bad debt expense is actually down sequentially from $8 million in Q2 of 2000 $21 million to $6 million this quarter.
Revision for impairment on our leased assets, which is a proxy for write offs was $3 4 million in the third quarter of 2021 versus $4 4 million in the third quarter of 2020.
We do not anticipate this to normalize back to our pre pandemic levels going forward.
In regards to the credit normalization that we are seeing one crucial distinction between buy now pay later in our at least our business is our revenue model is driven by customer lease payments, we don't rely on merchant discounts that rather higher margin lease economics, and therefore, we have more capacity for variations in our delinquencies.
In addition, our proprietary credit algorithms are constantly becoming more effective as we learn from additional data and sophisticated machine learning tools, which allows us to increase our approval rates over time, while maintaining lease performance that meets our hurdle rates.
Finally, I would note that there are some elements of counter cyclicality to our business as we discussed on our last call historically high savings rates and low delinquency rates earlier, this year, but subprime providers slightly stretching down the credit spectrum to capture some consumer transactions and our highest score band.
Now as the credit environment normalizes any modest securities in a macro consumer credit levels can be positive for our company as we expect Brian credit providers will tightened their underwriting leading to higher quality consumers coming down into our market and improving the overall quality of our customer pool.
Turning to slide nine overall operating expenses were up $10 $3 million year over year. This operating expense growth can be largely split into two categories first additional expenses of being a public company, including D&O insurance premiums accounting and legal expenses.
Second is investments in future growth focus on technology and product enhancements and additional business development staffing our technology headcount, including contractors is up from 32 professionals a year ago to 69 today and our sales and marketing head count is up from 19 to 37 full time employees, we anticipate that these expenses will <unk>.
<unk> as a percentage of our revenues as we scale new growth origination.
We expect investments in growth to continue into 2022, as we invest to capitalize on the massive scale of the addressable market opportunity ahead of US we believe that the potential payout to those investments is significant overtime as Orlando will discuss further.
Thanks, Chris.
We continue to maintain the strength of our balance sheet, which gives us the flexibility to invest in organic growth initiatives. We closed the third quarter with nearly 100 million in unrestricted cash on hand, and $57 million available from our asset backed revolving line of credit.
We're putting our strong balance sheet to good use by continuing to strategically invest in our business in order to capture greater market share. Our investment focus continues to disrupt the omnichannel experience through technology and product enhancements that are aligned to our mission statement of financial inclusion and to support a clear and transparent shopping experience.
We recognize the need to expand our sales team and continue our investments in marketing and accelerate our growth we have doubled the size of our business development team over the past year to 30 people, which includes six team members who joined during the third quarter.
Each new team member is on boarded during a 90 day period and has been able to start generating leads and bringing in new merchant partners.
We are also more than doubled the size of our technology and product team year over year. Our team is working on three key fronts, one platform expenses to support new and emerging merchant demand across all channels to operating infrastructure that will support large scale expenses and three customer and merchant solutions that <unk>.
Spanned access and transaction opportunities.
We are already seeing the results of these growth initiatives as we continue to steadily add new merchants.
We added 82 merchants year to date compared to 54, new merchants during the full year in 2020, we anticipate that growth will accelerate into the coming year, particularly as we expand more diverse end markets.
In addition, our firm partnership on their connect platform continues to expand we have recently identified more retailers, where the connect platform will bring new incremental customers. We continue to be excited about this partnership as it gives retailers a simple platform to acquire new loyal customers.
While the bulk of our recent merchant additions have been smaller partners, our dialogue with medium to enterprise sized.
<unk> continues as well we believe that.
The growing evidence of our distinctive customer centric approach is accelerating discussions with larger volume partners. Although it's worth a reminder, that sales and onboarding cycle for merchants can be quite long, we continue to build our merchant base, while we manage our business with an eye towards sustainable long term growth.
Canopy will provide strong value to merchants are a variety of integration options ensure the integration is achieved sufficiently in as little as 30 days.
In addition, our proprietary and differentiated technology and highly predictive risk model offers merchants have the opportunity to access a large segment of underserved non prime consumers driving higher conversion rates and higher sales.
Many of the transactions is enabled by capital or incremental to merchants as these customers would have otherwise been declined by traditional financing options.
We also drive repeat business for our merchant partners by providing needed service of excellent customer service and support.
We are truly built for long term relationships and we see it in our customer data repeat customers are up 42% year over year with more than 50% of new gross originations coming from repeat customers.
Our merchant pipeline is larger than ever before and as merchants resolve their variety of near term challenges and constraints that you're facing such as supply chain issues and shortages law resources, we anticipate our growth trajectory to accelerate over time.
Our customers appreciate the ease of use of the catapult platform and our customer centered approach our lease applications are straightforward and provide our customers with flexible and transparent payment options for their fine for a lease through our direct integration or one of our waterfall partners like a firm.
Our customer satisfaction continues to be high with a net promoter score of 60 as of September 32021, which is up 23% year over year.
In conclusion, as we head to the end of the year, we are proud to be providing high levels of both customer and merchant satisfaction. We're also pleased with our ability to weather the storm of continuing macro headwinds, we believe our near term investments in new customer solutions and multichannel merchant opportunities will open up even more growth potential.
In 2022 and beyond.
I am excited about our positioning and ability to take advantage of the long term secular trends of e-commerce, and retail, which matched with our strong balance sheet will provide us with ample liquidity to strategically grow our company.
With that I will now take questions.
Thank you to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key again that is star then one if you would like to ask a question.
Thank you Sir.
Okay.
First question comes from the line of Ramsey Lso with Barclays. Your line is now open.
Hi, there. Thanks for taking my question. This morning I appreciate it.
I wanted to raise cash hi, there I wanted to ask if you could sort of help us think through.
The P&L implications of a return to a sort of more normal macro environment.
Does that mean sort of a return back to that high double digit growth we saw previously.
Yes.
I think it was.
Sure I think if we step back a little when we look at the macro environment. It continues to pose challenges, but we are seeing some green shoots around.
Credit normalization, our lease performance is stabilizing and those things.
Obviously going to help us as we see the credit tightening on the prime side.
Noticed.
Lenders have.
<unk> been talking about are posting that they're delinquencies have been increasing lately that means that would lead to more tightening which should generate kind of normalization of what we talked about last time.
And the better credit customers coming to us. So we're pretty excited that things are starting to get back to normal.
And then from a growth perspective and growing the business.
We continue to capture market share.
Steadily adding new merchants.
The merchants have been pretty distracted.
Yes.
<unk>.
I'm getting integrations because of the supply chain issues that they face. So we see kind of the door starting to open a little bit as we get through the holiday season and into next year.
Yes, Eric Ramsey. This is Eric I'll, just add that we've been continuing to progress on our path really consistent with our broader strategic goals of building a durable enterprise here for the non prime consumer.
That includes investing in our channel partners and our channel investments. So that we can scale up rapidly seen some of the announcements that we added different platforms.
And different channel partners and this is really critical for us to be able to scale quickly and in addition, we've been running many controlled experiments with tinkering at the margin with our R&D about improving conversion and improving personalized offers for individuals and we are really excited about the results that we're seeing and that's how we believe that we're going to continue to gain share and as the growth comes back.
Back in some of these areas, whether it's been depressed.
We'll be.
Gainer in that space.
That's great that's great. Thank you.
I wanted also to ask about an update on the construction.
Strange.
Partners I'm, just trying to gauge whether that is certain is starting to loosen up or remained somewhat of a bottleneck.
Yes, yes, I mean, we're starting to see.
It kind of normalizes I think is the way to describe it obviously during holiday season, many of our retailers through our holiday driven are in.
Please code freeze.
No.
What we're seeing.
Kind of more response around let's talk after the first of the year, let's put your integration later.
So.
I believe after the first of the year, we're going to see that open up.
And would you think would you characterize that as sort of.
Some pent up.
Implementations that would then disproportionately benefit sort of next to get pushed into next year, and therefore provide a little bit more of a tailwind next year is it.
<unk> okay.
We believe that not only that but I think they were also between the ship.
Supply chain disruptions that they're trying to manage through.
And then some of the Npls, which kind of got the.
<unk>.
This year.
Now the prioritization I think we're moving up the prioritization level with many of the retailers we're talking to.
Got it terrific. Thanks, so much.
Thanks Ramsey.
Our next question comes from the line of Josh Seigler with Cantor Fitzgerald. Your line is now open.
Hi, guys. Thanks for taking my call.
Hi, John a question Hi.
Hi, Yeah. My first question is around the increased penetration at your largest.
Partner I'd love to get a little more detail around what were the driving factors behind that and do you believe that can continue in the future.
Yes, I mean, the team worked really closely with our top retailers and actually many of our retailers around how do we drive conversion rates and we do a lot of marketing a lot of testing obviously, our return customer basis is really strong and continues to grow so that helps to drive that penetration rate even higher but.
It is about how you position the product to the customer online it's much different than in store, where a salesperson maybe.
Over the narratives.
<unk> been testing many options on trying to improve that conversion rate, we see the conversion rates, improving we're pretty thrilled with.
The fact that.
Our top retailer was 21% down and we saw some gain share there Derek do you want to add anything.
Yes, Great question really we've got a revision of being able to deploy personalized offers for every consumer given their situation.
Whichever retailer and whatever kind of type of transaction and theyre looking to execute.
And many of the investments we made earlier this year gave us more capability around that space and so our ability to test and give relevant propensity offers.
And campaigns are really showing some early signs of a prudent.
The team is really excited about those results and we think that that's helping us gain share.
Excellent yeah that color was very helpful. Thank you and then.
We've seen a lot of big box retailers.
Start implementing traditional buy now pay later offerings into their checkout.
See that progressing over time as they eventually move to the non prime customers and lease to own and simply it's just a matter of progressing down the chain I love to get a little more color on that.
Yes no.
That's exactly right Josh.
Right now be NPL is hot.
And not that it won't be hot for a while it will be but I think it is just a prioritization level with many of the retailers and as we see they are managing through the supply chain issues and they're working through the holiday season that we continue to.
Drive.
To prioritize things that further up the chain. If you will so we will see that I think happening after the first year <unk> is really easy to implement because it's just splitting the payments over four.
Its not as.
Complicated as ours could be and also can drive.
Quite a bit of incremental business, but I think once that's done.
Then the next step is how do I drive, even more incremental customers and thats through lease to own.
Yes, Josh I'll, just add one thing is that.
The process of going from a <unk>.
<unk> conversation on to catapult conversation, it's just an evolution of understanding the power of getting payment flexibility to the customer set.
The non prime customer is on these retailers' websites or in their stores already and.
We just have not traditionally been able to transact or not transact at the level that they would like to and so we just see this as a journey that retailers are going through of awareness of what different payment options of financing can do for them and how that powers loyal and recurring transactions from great customers and accessing new markets.
Excellent. Thank you very much.
Thanks, Josh.
Our next question comes from the line of Mark Argento with Lake Street. Your line is now open.
Hey, Good morning, guys. Just a quick question on Hi, just.
Just a quick question on where you guys are in terms of your sales team I know it seems like you guys had been higher and fairly.
Aggressively in building out the team any updates there would be helpful.
Yes, we've been real aggressive actually we had I think a team of seven new business development reps start this week.
<unk> been real aggressive in hiring surprisingly I know that hiring has been tough, but I think we're able to attract really strong talent on the sales side.
Right now we're up to 37 people and this includes the lead generation support and account management, but mostly focus on those business development guys that they take about 90 days to get on boarded.
So once they are on boarded they start generating we start generating leads for them to start doing the reach out and some from an SMB perspective.
Relatively quick so we should start seeing the fruits of that labor into next year and then on the enterprise side, we added a couple of heads.
They are out talking to the larger merchants that do take a little bit of time, but we believe that we've got to be out there talking about the mission talking about the company.
And getting our name out there and it's going to be done with that large team. We're going to continue to add I think by the end of the year. We will have over 50 people in that group and we believe that's a really good capital allocation because we have some really strong processes around how we're generating leads so we're reaching out to leads the marketing support that goes along.
Is that.
But really we're starting to see some green shoots if you will on conversion rates.
Okay. That's helpful. And then just one quick one in terms of I know you had mentioned it seems like overall broader.
Consumer credit default rates are starting to tick up a little bit.
Partially as a result of probably less stimulus.
To a degree.
Terms of the buy now pay later guys. It seems like maybe there were stretching their brands a little bit in terms of how far down the credit spectrum. They are willing to go and do you anticipate maybe tightening back office.
Credit default rates start to tick up a little bit stimulus isn't as robust.
Yes, Mark that's exactly what we believe is going to happen in the early signs.
Announcements delinquencies on the prime side are starting to increase so thats a natural tendency is for them to tighten up, especially in the lower credit bands and those are the customers that will flow to us in kind of that as well. That's why we stated in the prepared remarks, but we're starting to see more credit normalization.
Great. Thanks, guys. Good luck through the holidays.
Thanks Mark.
Our next question comes from the line of Anthony <unk> with loop capital markets. Your line is now open.
Good evening.
Morning.
So a couple of questions I guess first question.
It was on gross profit.
Obviously, it was down pretty significantly year over year now obviously part of that was bad debt expense, but I was just wondering if there's if there's any additional color you can give in terms of the drivers for the lower gross profit.
Yes, absolutely.
Chris.
Well, we spoke about in the prepared remarks, and I think what we're seeing across the board.
That credit is normalizing and so if you look at last year versus this year on gross profit last year, we were in the midst of stimulus and lowest delinquencies in our history and the company and so now we're just right. So I think to a more stable gross profit percentage on top of that our revenue and I think we spoke about it last quarter and it is.
And for Q3 is that we are we are testing and working through pricing promotions operate other personalized.
Incentives.
We really see.
See how we can drive conversion rate, which obviously, if you charge that youre going to have less revenue that youre booking. So it's a function of both of those credit organization and some of the promotions that were testing.
Got it that's helpful.
And then I guess my second.
<unk>.
When I look at your balance sheet, you've got over $100 million in cash and obviously your stock dislocated pretty significantly after.
Your second quarter.
Earnings release, So I guess I was just wondering what.
What's the thought process in terms of aggressively buying back stock you just saw one of your competitors announced.
A pretty large Dutch tender the stock reacted pretty well to that so I guess.
What's holding you guys back from buying back stock.
Yes Anthony.
I think we're great.
I know and I don't think we're a growth company.
We had a lot of discussions around what do we how do we deploy our capital and really we're focused on growing the business and we're adding a ton of salespeople.
More than double the number of salespeople that we had last year, we're investing on the tech side, so that not only do I have.
The platform stabilized, but also we're working on some new initiatives that will help continue to drive that growth to support those salespeople. So I just think it's wise to invest in the company at this stage.
And that's what we've chosen to do.
Got it that's helpful. Thank you.
As a reminder to ask a question you will need to press Star then one on your telephone.
Our next question comes from the line of how coach with loop capital. Your line is now open.
Hi, there.
Mentioned the loss rates.
And normalize that.
Pre COVID-19 levels.
Curious to get your thoughts on.
How that transpired and what Youre collections, well stack your collections people well staffed and what are some of the other drivers why do you think normalized pre COVID-19 levels.
Yes. Good question. So thank you. This is Derek so just when we look at delinquency and when you look at the trends when we talk about our loss rates.
And what's been happening in the portfolio certainly we have to look back now many many months to see trends that look like pre COVID-19.
And what we're seeing is essentially.
Patriot raids and execution that looks much more similar to late 2019 than it did to anything in 2020 or early 2021 and these are areas that we're very familiar with we're very familiar with having the right amount of staffing the right amount of resources and just to.
Just emphasize most of what we do in terms of how we.
Drive performance and carrying of accounts that go delinquent is all in the digital space, we're very customer communication centric we're very.
Clear on having technology drive our solutions, so that we support customers in curing and Thats very data driven approach. So staffing is not a major issue for us whenever we go through the seasonality of these ups and downs and so we're really proud of how the team has responded to these shifts.
Both on the data science and the policy side as well as on the on the collections execution side. So.
Just kind of part of everything that we do on a day to day basis.
Okay. Thank you.
Thank you.
There are no further questions I will now turn the call back to Orlando for closing remarks.
Thanks, Sarah so.
We continue to be really excited about our long term growth of the company, we're starting to see some green shoots in the aggressive hiring of our sales team the penetration rate improvements that we're seeing.
The build out of our tech team to disrupt what we're doing both on an e-commerce perspective, and the Omnichannel experience. So we're excited going into 'twenty two that we have the team very energized on providing financial inclusion into our underserved communities and disruption of ecommerce continues or <unk>.
Customers are merchants rely on us to continue our merchant mission through the next several years. So we're excited that you've joined us and.
I appreciate the questions and thanks for your time today.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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