Q1 2022 FlexShopper Inc Earnings Call
Okay.
Breathing buckets, there flex shopper L. L. C 2022 first quarter financial results conference call at this time, all part I Pistons are in a listen only mode.
A 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 will now turn the conference over to Carlos Sanchez Investor Relations. Thank you you may begin.
Thank you and good morning, welcome to flex shoppers first quarter 2022 earnings result conference call.
With me today are Howard of Oregon, Chairman of the Board Russ Heizer, Chief Financial Officer, and John Davis, Chief Operating Officer.
We issued our earnings release last night and corresponding Investor presentation. This morning, and we will be referencing these during the call.
Both can be found on the Investor Relations section of our website will be available for Q&A following.
Following today's prepared remarks.
Before we begin I would like to remind everybody.
This call will contain forward looking statements regarding future events, and our financial performance, including statements regarding our market opportunity and the impact of our growth initiatives and our future financial performance.
This should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC reports, including quarterly report Form 10-Q as of March 31st 2022.
These statements reflect managements.
Management's current beliefs assumptions and expectations and are subject to a number of factors may cause actual results to differ materially from those statements.
Except 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 on.
That can take constitutes non-GAAP financial measures under SEC rule. These include measures such as adjusted EBITDA and adjusted net income. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results reconciliation to GAAP measure.
<unk> and certain additional information are also included in today's earning release, which is available on our 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 Howard.
Thanks, Carlos Good morning, everyone and thank you for joining us on the call. We will review the results of the first quarter 2022 and provide an update at <unk>.
Date to our growth strategy, I know that signed off and the chairman speak so on a quarterly on quarterly calls.
But there are some items that so it's best to cover personally first I'd like to.
Mike.
Yeah.
First you'd likely noticed that rich house is not joined US today is on medical leave at the moment.
But we do expect him back in action in a few short weeks in the interim I'm joined by our CFO Russ Heiser, who most of you have known for a few years now.
Also joining us is John Davis, our COO, you can expect to hear from John a good bit today and going forward as he has become an integral part of the flex shopper team over the last year or so.
He joins us with 20 plus years of non prime consumer financial experience both in the U S and abroad, and we will be part of these calls going forward.
For those of you who do not know me I've been in the consumer credit industry for almost 30 years I have bought and sold several companies.
Over the course of my career because of my past experience I was introduced to flex shopper around five years ago and have been actively involved as an investor and advisor and current chairman of the board when I first met collect shopper the concept of virtual lease to own.
Made total sense to me.
And that was my attraction to the company I saw the potential of being able to help consumer consumers purchase durable goods, who are unable to use traditional credit programs blood shopper initially focused on lease to own transactions occurring outside the traditional brick and mortar stores.
They built its own marketplace for its customers very unique at the time over the past over the past years, we have added payment methods, which allows consumers to shop at their favorite stores and partnered with numerous retailers to grow sales with credit challenged consumer.
Yes.
<expletive> shopper is not the only virtual.
At least one company, but I do believe we are the best.
And we have the best marketplace.
Is the most straightforward and consumer friendly.
Offering on the market.
We knew that we did not want to be yet either see player only and.
And have invested money and time into developing retail partnerships, which have added new avenues for growth.
In the last quarter or our retail partners and payment plug ins made up 40% of our leases.
That business did not exist a few short years ago.
Our retail partner business has.
It has a lower cost of acquisition and higher lease values, leading to better return on capital. We continue to add new partners and the best in building. This business I realize we do not share a lot of details of our retail partners.
Its own purpose.
That's due to competitive competitive positioning.
I assure you that this will continue to be our focus.
As we work to invest.
To build as part of our business.
We have also partnered with a bank to add installment loans as a complementary product to assist nondurable goods retailers.
Drive installment loans.
More.
John Davis is managing that business and we expect that to continue to drive growth in revenues.
And then in the future.
We spend a lot of time and effort launching this business.
And they have rolled it out slowly as we wanted to make sure that our underwriting and risk models are working properly, especially in this environment, where our customers are facing severe inflationary pressures.
Now as rich house is not on the call. The one thing he has always stressed in the past to his team.
Is risk adjusted return of capital.
I agree 100%, we do not want to be in the business of losing money.
I stress to the team that we need to grow but in an economically sensible fashion, we don't need to grow just for the sake of growing.
We don't have the balance sheet or capital costs of some of our peers that can take more risk on this type of consumer we invest for the long term.
And that's where we'll stay.
I know many of you have been disappointed with the organization's growth over the last year and frankly, so if I.
However, in this environment in which disposable income has been steadily declining.
For our applicants this was the absolute correct decision.
As you have heard on previous calls the amount of federal stimulus what I believe was expansion in credit from lenders that are typically not serving this type of consumer we need to make the appropriate decisions, even if it meant to lower originations.
Continue to have the utmost confidence in this business model.
As you can as can be seen by our growth in my stock purchases.
As well as my commitment.
Of that capital.
Provide profitable growth.
So.
And are some of the thoughts and history of flat shopper, but I did want to talk a little about why I think at this point, we are in a great position to take the company to the next level. We spent some funds this quarter to invest in sales support teams and support our retail partnership.
And that alone has won us deals.
The boots on the ground concept to.
To supporting lease origination growth is the right strategy. While this results in near term EBITDA declines.
It will be a terrific investment over the long run.
As mentioned in the last call less shopper continues to expect double digit EBITDA growth for this year.
I also know that some of you are likely concerned with the growth of our debt in this consumer lending space I'm most efficient way.
To fund growth.
As through.
Additional debt.
As a significant equity investor myself I'm focused on driving earnings as much as prudently possible knowing that it will eventually represent.
<unk> price.
Increase.
While the equity values of the entire consumer finance segment, including flat shopper.
Declined significantly over the past six months I have continued to invest in a.
<unk> shopper when I am allowed to.
Purchase.
Like shopper has continued to grow EBITDA and earnings on a full year basis. When the majority of our peers are declining that's incredibly important to note.
I am not sure whether it is our size or perhaps our focus on the business and not or.
One investor outreach.
Like shopper continues to.
In somewhat misunderstood by the market.
As the company continues to focus on new products and strategic opportunities. We will also be doubling down on investor outreach in a variety of forms to lead our investor community better understand.
And appreciate the good things that are happening at flex shopper.
I will say I'll stay on the call and.
And we'll be happy to answer any questions at the end.
I will now hand, the call over to Russ.
To go over the first quarter results and further discuss some of our new initiatives as mentioned.
Howard.
Around the time of flips shoppers founding rent to own was evolving away from standalone rent to own stores, but the credit challenged and in the offerings save the sale opportunities at all types of brick and mortar locations with.
With the creation of this virtual rent to own product the same credit challenged customers, we're able to access goods that weren't available in the traditional rent to own stores.
The concept of flex shopper wish to expand this strategy by creating an online marketplace, where customers could have an access to even a wider assortment of goods.
And over the last several years, we've seen some of our competitors moved towards our segment looking for additional growth.
At the same time like shopper expanded its technology and began to partner with brick and mortar retailers.
However in speaking with these retailers, we learned that the rent to own product. So it was not a one size fits all solution for their credit challenged customers. Some retailers were in states without traditional lease to own regulations. Other retailers, we're focused on service offerings, including repair that did not fit into the durable goods criteria for our lease to own offering as one might expect that.
The retailers offered both durable goods and services, but we're only offering liquidity options for a portion of their business.
Therefore, a little over a year ago like shopper began a partnership with a third party bank that it would allow us to assist our retailers by offering installment loan products to the underserved credit challenged customers. This is significantly increased flex shoppers addressable market and provides significant runway for further growth.
Perhaps more importantly, the expands upon flex shoppers initial vision of bringing a financial inclusion to underserved non prime consumers with new solutions.
These new solutions out allowed these non prime consumers to access the essential products they need for everyday living.
We are continuing to look for strategic ways to provide new offerings to this consumer.
In the interim our suite of merchant solutions across a variety of integrated point of sale options is expanding and allowing merchants.
You can access our products more efficiently.
In addition, our legacy marketplace allows us to approach these customers with follow on opportunities.
We are committed to continually improving the customer and merchant experience to gain share in our addressable market, while creating new products to grow this addressable market.
I'll, let John focus on how our team is navigating an economic environment that is challenging for both our merchant partners and consumers, but I want to emphasize that while we are not immune to these macro pressures. We are confident in our longer term ability to handle these challenges, while staying focused on capturing new volume opportunities.
Key strategic highlights for the first quarter or the growth in new storefronts are.
Our pilots that we've mentioned in the past are proceeding well and with a robust robust pipeline and expect to add another thousand storefronts are about 75% new stores in the coming months. In addition to loan participations had been growing rapidly and allowed us to comp positively versus the same quarter last year.
When combining both loan participations and lease originations.
Finally, before I dive into the financials. It is important to note during the quarter, we added high caliber talent in key leadership roles since two.
<unk> the execution in support of our growth opportunities.
<unk> and CMO and CRM have been made to complement the change in the CTO role that occurred last year.
All of this works together to help us create a sizable durable and scalable business.
Before I cover our financial results for Q1, 'twenty, two I want to remind investors that the rapidly changing macro environment weighed on some of our metrics total revenue for the first quarter of 'twenty. Two was 29 million, which was down 11, 7% year over year lease revenues were $27 8 million and down 15.
One 2% year over year in loan revenues were $1 2 million and up over 3000% year over year as we expand upon this new product.
Gross originations were only up 1% due to the impacts of this and micro challenges that we experienced.
As we noted earlier, our tighter underwriting lowered approval rates are that also drove this slower growth.
Lease originations were $16 3 million and down 22, 1% year over year loan participations were $4 9 million and up almost 5000% year over year.
Gross profit was down 1 million almost $1 million year over year, due primarily to declining lease margins driven by underperformance in our lease portfolio for parts of <unk>.
Our net loss for the first quarter of 'twenty, two with $2 4 million compared to net income of <unk> 12.
12.
Dollars in Q1, 2021, and adjusted EBITDA decreased by $2.5 million.
Operating expenses below gross profit were up 1.8 million year over year. The total operating expense difference is largely driven by three factors. The largest increase is the incremental variable costs, including marketing and support services to expand the loan business that did not exist last year.
As we continue to grow that business.
The scale effects will lowered the impact.
The impact of these increases the largest.
Cost is the that's the next largest is the cost of field support team that has been assisting the sales efforts and our new retailer doors. This team has been instrumental in helping support pilot programs win new business and increase the fundings of our current store fronts.
Some of these costs are upfront costs that will moderate as new retailers come on board and we achieved better scale efficiencies.
Final factor or some duplicative technology cost as we create more scalable and efficient processes. Both on the lease management and a customer servicing teams. These costs will decrease significantly in the coming months.
All of these decisions are part of our strategic growth plan in the ordering of all of our efforts are based on what create the Maxim.
Return on investment.
John will touch more on the changes in underwriting over the past six months. However, the bad debt allowance will continue to reflect higher than stimulus period bad debt for the near future.
We are finalizing opportunities to monetize some of our past due accounts that will significantly offset the increases in our bad debt allowance.
Now I'll turn it over to John to discuss our operations in more detail.
Thanks Russ.
I would like to begin by discussing our new lending initiatives like shopper has engaged with a third party bank partner to offer consumer loans to our customers.
In alternatives to our leased product.
[noise] alone customers can finance, a wider array of goods and services that at least product does not allow.
This provides our customers more flexibility in their purchasing ability.
Partners with increased ability to grow their sales and flat shopper with a new avenue for originations growth.
Our loans PA program was launched in Q4 of 2020 and has been in testing through 2021.
We've been pleased with initial performance of our testing and now starting to increase origination volumes of larger levels.
Approximately $5 million in loans originated in Q1 of 2022 bar Bank partner, which exceeded total loan origination volume during our 2021 test period.
We intend to continue to expand our lunar program volumes in Q2 as well as for the rest of 2022.
As we add these new customers to our portfolio, we are continuously monitoring asset quality and adjusting our underwriting standards to ensure that loan performance meets our expectations, having another financial products to offer to our customers provides flex shopper diversification and its revenue sources beyond our lease channels it increases our.
Growth avenues.
Coming into 2022, our customers are facing an increasingly difficult macroeconomic environment with higher food housing and energy prices, placing pressure on their disposable income.
While our customers had been resilient to the impacts of the pandemic over the past two years the combination of increase in costs and reduced support from the government in the form of stimulus has created some headwinds for customer payment performance within our lease book.
Keeping asset quality strong is a key tenant of our business.
We have seen some higher defaults in our customer payment performance in 2020, one compared to 2020, which caused an uptick in our bad debt allowance as Russ has mentioned and as a result, we have tightened our underwriting standards through the first quarter of this year.
We are always mindful of our return on capital.
<unk> asset quality over growth.
Lower tightening has suppressed lease origination volume levels in the first quarter. We are pleased with the early analysis of these underwriting changes, we expect our bad debt reserve levels to improve over the year as these changes mature mature into our portfolio.
Additionally, we continue to invest in our decision science team will allow us to further optimize the wealth of data available to us as well.
We evaluate new and repeat customers and enable us to approve more applicants will keeping asset quality high.
We have observed that some of our peers and the lease to own space have experienced an increase in their bad debt reserves and charge offs as well.
And this kind of environment what has happened in the past is that consumer lenders both at our peer group as well as above us in the credit stack began to tighten as well.
As a result of this more customers with an average.
Quality higher average quality customer profile become available to flex shopper as these customers no longer qualify for offers offers previously available to them.
While it is early going we're starting to see this demand increase in Q2 again, keeping asset quality is an important tenant of our business. So we will continue to be proactive to ensure that we can react quickly to shifting market and economic conditions.
As Russ previously mentioned total origination volume was up 1% year over year.
Due to the increased origination volume from our loan product.
Over lease origination dollar volume was 22% lower year over year in part due to tighter underwriting standards I previously mentioned as well as lower demand for as our customers are becoming accustomed to their higher cost of living.
However.
We have a natural competitive advantage compared to others in our space due to having both our proprietary direct to consumer marketplace as well as a growing point of sale partnership distribution model.
Starting to see positive shifts in consumer demand this quarter in both of our lease channels. There's other lenders are adjusting their standards.
We have invested in our internal marketing team over the first part of 2022 we're achieving success in enhancing personalization programmatic communication strategies marketing channel mix and remarketing efforts, which are resulting in improvements in repeat customer originations and the highest conversion rate on our approved applicants not seen in quite.
Some time.
Art repeat customers demonstrates significantly better payment performance in comparison to our new customers and higher proved conversion rates represents zero cost leases to us as marketing spend was already incurred to attract potential customers to apply.
Repeat customer mix represents almost half of our total lease originations and this mix is at its highest level. We've seen since Q2 of 2020 I'm very pleased with both of these trends and I'm excited about future gains that these growth initiatives can bring to our company.
On our point of sale partnership channel, we're enjoying strong momentum in retail partner store fronts that have flex sharper lease and loan products available with a 16% quarter over quarter increase achieved.
We are currently rolling out new partnerships and have a strong pipeline of potential new relationships that will provide additional opportunities reflect proper distribution.
As mentioned in our earnings press release, we are expecting a significant increase in our partner storefront count over the next couple of quarters. There's also a halo effect that our loans and marketplace businesses will experience as new customers are introduced to flex shopper and make subsequent purchasing or lending transactions through our other available channels.
Taking into account all of these positive trends in both our marketplace and point of sale lease channels, we expect lease originations to be higher year over year in Q2, while at the same time, keeping our tighter underwriting standards in place, which will be the first time, we have achieved a positive lease year over year comps since Q2.
2021.
We are optimistic about achieving growth both in our lease and loan channels, while keeping asset quality in line. Despite the challenges that our customers are experiencing with escalating inflation and removal of stimulus support.
Personally joined flex shopper, a year and a half ago because of the tremendous opportunity. They saw in the company a platform and the team.
I'm excited and where the company is going.
With that let me turn the call back to Russ.
Thanks, John in conclusion, as we look ahead to the rest of the year, we remain confident that flex shopper is positioned to grow through this continuous turbulent environment. The leadership team and the entire company is focused on pursuing the strategic options that will drive our next phase of growth.
Most importantly for investors, we are still confident in growing full year EBITDA versus last year with that we'll now take any questions.
Thank you if he would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys, we will pause for a brief moment to poll for questions.
Once again it is star one on your telephone keypad, if he would like to ask a question.
There are no questions at this time I would like to turn the call back over to management for closing comments.
Thank you for your time everyone.
We're really looking forward to the rest of the year.
I think youre going to see some interesting strategic announcements in the second half of this year.
We are very bullish about the opportunities in front of us.
And what they mean for the company and its shareholders.
Thanks as always for your support.
Thanks for your time today.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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