Q3 2021 FlexShopper Inc Earnings Call

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Greetings and welcome to the Flex Shopper LLC third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A brief 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.

Under this conference is being recorded it is now my pleasure to introduce your host Jeremy Hellman. Thank you Jeremy you may begin.

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 flex shopper dot com and encourage everyone to review the forward looking statement on page two of the presentation with that I would like to turn the call over to flex shopper CEO Rich house. He's go ahead rich.

Thanks, Jeremy and welcome everyone to our earnings call.

Joining me today is our CFO Russ heiser.

And as always Russ will be expanding on the key financial aspects of our quarterly results and I'll cover our operational highlights.

Additionally, Russ and I are both.

I'm a recovering from Covid, so we'll try to keep.

Keep the raspy voices in golf and down as much as we can so we apologize for that ahead of time.

Our third quarter quarter was solid with topline revenue growth, but a nice increase in bottom line profitability.

Our year over year revenue was up 25% and EBITDA.

I was up over 100%.

Despite the headwinds of Covid in the third quarter. We also continued to make progress in expanding our retail partner ecosystem.

As Covid rates continued to wane, we are optimistic those retail partners will see their operations normalized and as that occurs we expect to see our least throughput increase accordingly.

Throughout the pandemic, our direct to consumer like shopper Dot Com website has proven a key asset and a driver of lease originations.

As we noted last quarter stimulus programs, where dampening demand across the rent to own industry, a subprime consumers were in better personal liquidity position that is purely.

Historically, it's been the case.

That dynamic continuing through the third quarter, but has began to diminish moving into the fourth quarter.

Our recent early payoff activity has begun to revert to historical patterns and this should be favorable for our earnings moving forward.

This is particularly positive behavioral change heading into the holiday shopping season, which is traditionally our busiest quarter for originations.

Turning back to our retailer relationships, we recently signed two additional partners.

We began to rollout this month and we're excited to see how those relationships.

Drive growth for the fourth quarter and into 2022.

I'm going to turn it over the call to rush and let him discover.

Specific items regarding our financial performance. Thanks rich.

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

And that deck, we have a number of data points that are useful and monitoring our performance.

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

Richard has mentioned our impressive revenue and EBITDA growth, so I'll dive into originations in gross margins.

First it flex shopper, we have mentioned repeatedly that we're going to focus on asset quality. As a result, we're only going to be willing to make underwriting decisions in the past the appropriate IRR hurdle.

This has resulted in a decrease in originations in this quarter versus the same quarter last year.

Those of you that follow our peers have heard that mentioned that the stimulus environment has not been ideal for lease to own demand.

This decrease is a result of our typical customer being presented with other liquidity options or having the personal liquidity did not need our services or a combination. We believe this is transitory.

In 2020, the third quarter was the first period in which we resumed a more normal underwriting stance. Following our initial conservative reaction to the pandemic when we tightened underwriting.

Those of you that have followed us for some time will remember that there was some pent up demand we had a really sharp increase in originations during the third quarter of 2020.

Conversely, the third quarter of this year continued to be impacted by stimulus artificially suppressed demand for rent to own and other consumer finance options often utilized by non prime consumers and results in an unfavorable comparison with originations down almost 30%.

However, our year to date originations versus last year are still up.

As we think about the end of the stimulus impacted consumer behavior, we expect it to occur in phases.

The first is the normalization of customers choosing the early pay off our same as cash option for almost a year customers have been choosing lower margin early payoff options that doubled the pre stimulus right.

This quarter as rich mentioned was returned to more normal take rates around our early payoff options and resulted in a bump in gross margin gross margin expanded to 41% compared to 36% in the same quarter last year.

Our margins have historically had some variance due to seasonality and the average age of our portfolio of different times of year. The primary reason for this variance was less early payoffs.

The second phase of this transition back to a more normal environment would be the return of customer demands.

So far in the fourth quarter, our originations are right on top of last year's numbers. However, as much as we would like to say that demand has returned to normal with the holidays around the corner, it's too early to draw a distinction between seasonality and a normalization of demand.

Our net lease merchandise balance at the end of the third quarter was $33 3 million, which was up seven 8% from $30 7 million in the prior year. So despite all of the headwinds we have been able to grow the portfolio.

Our largest variable cost as marketing expense marketing 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 third quarter, which was a slight increase from the $1 7 million from the third quarter of 2020.

But the trailing 12 months, our average customer acquisition cost was $96, which was a level, which week it still derive the appropriate returns on our capital we were able to support this higher acquisition costs due to impressive gains in the customers' first order value of almost 15% versus the same time last year.

Marketing EBITDA was $6 6 million in third quarter compared to $3 8 million a year ago adjusted.

Adjusted EBITDA more than doubled to $4 8 million compared to $2 $1 million during the third quarter of 2020 with that I'll hand, the call back over to rich.

Thanks Russ.

We're all we believe we had a solid quarter and fairly well. Despite the headwinds we faced in particular I'm proud of the Bottomline profitability, we were able to report.

Looking ahead to the fourth quarter conditions in our industry appear on their way to normalizing and that bodes well for us entering the holiday shopping season.

On that front I do want to make one comment around product availability as we've seen others comment on supply chain issues.

In our view much of these delays central and larger items or white goods like refrigerators or washing machines.

These are minor product category for us and our primary category as consumer electronics, and we are not seeing any delays.

One of the attributes of our flex shopper Dot Com website, we have a number of drop ship partners. So if you go to our site looking for a gaming console youll see options from several retailers.

That diversity of supply because we should be well positioned to deliver whatever item a consumer is looking for this holiday season.

As I have said for some time since I've been here, we continue to emphasize our core priorities, which are in this order.

Underwriting liquidity and distribution.

In good times and bad those elements help us.

Maximize our return on shareholders' capital.

However, I'd like to add to that comment.

We have a discipline of managing all of our marketing investments based on the appropriate internal rate of return at the marginal score range credit score range.

Therefore, there will be periods, where we invest more or less marketing dollars based on market conditions and.

In the previous two quarters, the stimulus payments and COVID-19 issues with our retail partners caused us to invest a little less in marketing, we'd like than we would have preferred.

Obviously that has resulted in significant increase in profitability, which points out the profitability of the assets that we originated.

As I mentioned earlier, even though we have continued our investment discipline, we've continued to grow the portfolio.

Our goal is to invest as much as we can in our marketing dollars to grow the company as fast as possible and we will never sacrifice the rate of return we expect on our investment.

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

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your questions in the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.

One moment, please while we poll for questions.

Thank you. Our first question is from Scott Buck with H C. Wainwright. Please proceed with your question.

Hi, good morning, guys.

And I'm curious.

Do you have a dollar figure in terms of originations that did not occur because of the store closures and retail or even kind of same store year over year stats that you can share with us.

Well.

Same store would probably not be appropriate Scott because we.

Starting with the stores right. So the same store sales are much higher because we you know obviously this started.

So that would be that would be we've had.

Huge increase in same store sales, because we didn't have the regional or before.

We don't have a dollar figure.

But I would say that is probably.

In the order of the cause of Covid I would say, it's in the order of 20% less than we would have.

Forecasted given a normal environment.

Okay. That's really helpful. Rich and then Russ can you help kind of walk us through or speak to the improvement in gross margin and kind of what the expectation there is going forward.

Sure so.

As I mentioned, a good amount of the increase from 36% to 41%, which was driven by the reduction early pay offs and we had need some underwriting decisions. When we had the increased early payoffs.

At the end of the day is as rich mentioned, we want to originate at the appropriate IRR as many customers as possible. So we've made some underwriting changes that will result in those gross margins returning to the high <unk> going forward.

And we should think about that as the long range number.

Okay that's perfect.

And then.

The decline year over year decline in origination is that driven by any particular product group or sub debt or is it pretty kind of broad across the offering.

It's pretty broad.

That.

What we what we look at as.

We have a model that we use for internal rate of return, which includes the cost to acquire accounts.

And.

And the payment behavior.

We haven't seen a substantial change in payment behavior, because we're pretty disciplined on that.

Some of the cost to acquire accounts was higher.

This year than it was last year.

Because I think a lot of people had pulled out of the market last year online.

So we just have to have the right discipline to.

To do that but it's across all categories, but.

As Russ I think mentioned in his commentary.

We're beginning to see that demand.

Pick up again in the fourth quarter and.

We're investing appropriate.

Okay, that's great and then last one for me on.

Marketing spend in the fourth quarter should we expect a similar step up from the third quarter as last year in terms of kind of absolute dollar terms or.

Does the being a COVID-19 year last year, and maybe a little less so this year change that.

No we're essentially seeing as I mentioned, we're seeing originations right on top of last year, we're seeing marketing spend.

Really similar to what we saw in the fourth quarter last year, so far so.

As you know as demand picks up we expect the same type of spend.

Okay, perfect guys, who I appreciate the time and I hope everybody is doing a bit better.

We're getting we're getting better we don't sound good.

[laughter].

Yeah.

Thank you. Our next question comes from Ed Woo with <unk> capital. Please proceed with your question.

Yes, I also hope you guys get a speedy recovery.

My question is on <unk>.

Competition have you guys seen a significant increase.

I guess the lease to own or some of the buy now pay.

Often for payment type.

Competitors have been recently entering the market.

No I think that.

Bye now.

Yeah.

Kind of frame this out the buy now pay later crowd, which is obviously growing very rapidly and has certainly been a.

Favorite of the market.

<unk> operates a little bit higher in the credit spectrum than we do.

So they're really not competitors with us so to speak.

I think where the competition has increased as more people have been investing online and online marketing, which includes credit card companies and other providers of liquidity such as installment loan lenders.

So yes, there is more competition in the online market than there was last year.

But we're not directly competitive with someone like a firm or coroner because they are they are a little bit higher spectrum mobile.

Yes.

Great and then my question is on the supply chain I know that there's been a lot of discussions about it.

Some of these people some of these retailers are you, saying that they don't have all the products. This holiday season.

How bad is it and do you think it's going to get corrected.

In early 'twenty two.

We've been fortunate as I said in my prepared comments in that in the electronics area. It's not been bad in fact, we had a.

Recently, we had a special promotion we were one of our main providers.

Two snow.

Games stations and that worked out very well.

We have enough electronic suppliers that.

They generally have one of the things that are needed.

Got big and.

And washing machines, refrigerators et cetera, and I think that's.

My understanding is that's where most of the supply chain issues are.

So we just haven't seen it.

Causing a problem for us I'm, not saying I know it exists, but it's not causing a problem for our particular business.

Great and then just one last question inflation is data.

Does that impact your business at all.

Okay.

Theoretically inflation.

Could be.

I suppose helpful right I mean, because the prices would go up.

<unk>.

We marked up prices right, that's what we do.

At some point, though it would get too high I, suppose where you'd get into an affordability issue.

You can always combat that with.

The appropriate underwriting so I.

I'm not too worried about inflation.

With respect to our business at this point in time, I think <unk> got into like a serious inflation mode. Then we would all have to think about that but but where we are at this point in time.

It may be more favorable less favorable, but I think it's probably neutral.

Alright, great well. Thank you I hope you guys recover.

Oh.

We're getting better we don't sound good.

Yes.

Thank you there are no further questions at this time I would like to turn the floor back over to rich house for closing comments.

Well, we appreciate all you guys participating on the call and we will talk to you next quarter. Thanks.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

Yeah.