Q2 2022 FlexShopper Inc Earnings Call
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Greetings, ladies and gentlemen of loan come to fix shoot Oh C 20, <unk> second quarter financial results Conference call.
At this time, all participants are in listen only mode.
A question and answer session last holiday formal presentation.
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I'll now turn the conference over to your house.
Sanchez Investor Relations.
Thank you and good morning, welcome to flex shoppers second quarter 2022 earnings result conference call.
With me today are rich House, Chief Executive Officer, Russ Heizer, Chief Financial Officer, and John Davis, Our 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 our Investor Relations section of our website, we will be available for Q&A. Following today's prepared remarks.
Before we begin I would like to remind everyone that 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 company's most recent periodic SEC reports, including our quarterly report Form 10-Q for the second quarter ended June 30th.
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 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 that constitutes non-GAAP financial measures under SEC rules. These include measures such as adjusted EBITDA and net income adjusted net income. These non-GAAP financial measures should not be considered replacements and should be read together with.
Our GAAP results reconciliations of GAAP measurements and certain additional information are also included in today's earnings 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 rich.
Thank you Carlos good morning, everyone and thank you for joining us for the select shop, our second quarter 2022 earnings call.
This morning, I'll be joined by the CFO , Russ Heiser and the Chief operating Officer, John Davis.
Call, we're going to stick with the format. We used last quarter I will provide an overview of our general results and strategies.
Russell will cover the financial results in more detail and John will provide some specific insights regarding how we are progressing on the execution of our strategies in both our leasing and lending endeavors.
Oh and with the prepared remarks with a brief summary of our future direction and we will have time for any questions. You may have prior to ending the call.
We are pleased to report second quarter, EBITDA of $6 $4 million and net income of $14 $4 million.
Russ will walk you through a breakdown of these results in more detail shortly.
I would like to spend some time focusing on how flex shopper is dealing with the current macroeconomic environment and how do we continue to provide profitable growth in this environment.
I'm sure everyone. On this call is aware of the U S economy has moved into a slower growth phase over the last nine months and.
Unlike previous slower growth phases in the past 40 years.
This slower growth has been accompanied by significant inflationary pressures.
The combination of slower growth inflationary pressure and a lack of continued government stimulus.
It seems to have taken a toll on the non prime consumer.
This is an unusual time and that there is not unemployment problem.
But the amount of money our consumers bring home from their employment is probably increasingly being spent on necessary expenditures.
Reducing the amount of money available to pay bills that are not required for everyday living.
It is quite possible some of these consumers made purchases using leases or loans when they were benefiting from government stimulus programs.
We did not anticipate the future inflationary environment.
It is probably impossible to unwind exactly what has happened regarding the non prime segment of the consumer population over the past several quarters.
However, it is obvious there hasn't been an impact on their payment behavior.
This has resulted in both flip shopper.
Our publicly traded competitors.
Announcing increases in bad debt allowances over the last few quarters.
Last quarter, we told you we have tightened our underwriting standards in order to deal with a declining economic environment.
In the second quarter, we continued to tighten further.
Ensure we were exercising the appropriate amount of caution in an uncertain economic environment.
The important part of the story, we believe separates like shopper from others, yes.
We can continue growing even while we exercise the appropriate discipline regarding credit risk.
I will now turn the call over to Russ for a review of the financial highlights.
And an overview of our new retail strategic partnership.
Thanks, Rich our second quarter financial results reflect the challenging operating environment as our customers and manage these inflationary conditions we.
We are navigating this situation by adjusting the items that are within our control. This has included significant changes to our underwriting approval rates new technologies around portfolio servicing and focusing on SG&A to align with the current environment.
Last quarter, we announced we had completed the testing phase of our lending business and we're moving into initial rollout phase.
Lending grew substantially in the second quarter of this year and we're confident we'll continue to add to our growth and profitability moving forward.
Lending is a natural complement to our existing leasing program, which is confined to only durable goods.
Capability of adding a lending product offering to our current lease to own offering significantly increases the size of the addressable market for flex shopper, providing additional avenues for growth.
Finally, the second quarter of this year does not resemble the economic conditions, the second quarter of the prior year.
In addition, our company has evolved significantly over the past year with the additional financing product and new retail channels, therefore, I'm going to not only cover the change versus the same quarter last year, but also the change versus the prior quarter.
Total revenue for the second quarter of 2022 was $36 5 million, which was up 19, 1% year over year and up 26, 2% versus the prior period.
Lease revenues were $30 5 million, which are down.
6% year over year, but up nine 7% versus the prior quarter.
Loan revenues were $6 1 million up from only $26000 a year ago NEP over 400% from the prior quarter.
Gross profit was up $6 5 million or up 58, 2% versus the same quarter last year and up 87, 2% over the previous quarter. This was primarily due to an increase in net loan revenues and a focus on monetization of delinquent accounts.
Operating expenses were up $2 6 million year over year. The total operating expense growth is largely driven by three factors.
First there was a $1.9 million increase in direct marketing expense to drive the growth in total fundings of both leases and loans next they were about 200 K of one time costs related to expanding the underwriting and marketing teams and field, there's new additions are already contributing.
The final $500000 is related to the new strategic businesses and includes employees and variable costs for the loan servicing as well as growing our wholesale initiatives. All of these expenses were in our budget and are part of our strategic growth plan, which rich will discuss in more detail.
Adjusted EBITDA was $6 4 million, an increase of four point to $5 million year over year up from $2 1 million in the second quarter of 2021.
$6 5 million versus the prior quarter.
Our net income for the second quarter 2022 was $14 4 million compared to net income of 942000 in the second quarter of 2021.
The release of the deferred tax asset valuation allowance resulted in a tax benefit of approximately $12 5 million in the second quarter of 2022, excluding the tax benefit net income during the second quarter was $1 9 million or double the same quarter last year and up $4 2 million versus the first quarter.
The last point I wanted to touch on.
As our retail partnerships and our new technology partner.
The bulk of our legacy brick and mortar retailer partners have been 500, plus a door regional and national retailers.
<unk> initiatives were developed to onboard these types of retailers quickly enabled rapid rollout with without immediate integration into the point of sale.
Unfortunately this segment of the market is extremely competitive and has a very long sales cycle.
However, we had a significant backlog of smaller retailers that we cannot onboard as quickly or efficiently as we wanted due to our legacy technology.
Beginning of the year, we've been looking for a paas to allow us to enter the smaller retailer market and recently entered into an exclusive relationship with a technology partner and is enabling us to onboard in service of single store retailer as well as our 800 store partners.
As such we expect our door count to increase by 600 doors before the end of this year. As a reminder, we started this year with 1250 doors and expect to end the year around 3000 active doors.
Our addressable market of brick and mortar retailers says.
As increased significantly and combined with our suite of financing products will boost our retail presence, while also diversifying into more small and medium sized retailers of course that hasn't changed our strategy around adding additional national retailers are expanding our current relationships with the larger retailers in fact, one of our larger lease to own retailers.
Also has storefronts that were not sued you for us historically because of their focus on nondurable goods that retailers now increasing our footprint with them via the loan alternative.
<unk> to start piloting this fall and based on the timing of the full rollout will be an additional 500 plus stores.
Are they ended the first quarter of 2023.
Our sales pipeline continues to stay robust and is a testament to our approach of offering a variety of products accessible both online and in the stores now.
Now I'll turn it over to John to discuss our operations in more detail.
Thanks Russ.
As rich in Russia, both mentioned in their remarks, we are operating in a challenging environment for our customers with inflation levels not seen in decades.
Our customers have lower spending power in their wallets and they are available cash is being prioritized start housing food and other necessities and shelf and essential items.
Such as car payments mobile phone service and other key obligations.
As mentioned in our last earnings call, we tightened our underwriting standards in Q1 of this year in response to these conditions.
These actions have resulted in better year over year early default rates have continued to see stress in our consumer payment performance in Q2.
As a result, we have continued to tighten our underwriting standards within our lease business over the past quarter.
This has resulted in a further reduction in approval rates for new customer applicants.
To put this into perspective, we have reduced our approval rate by 38% in Q2 this year compared to what we were approving in Q2 of last year, which is a significant move lower.
Despite this tightening I am pleased to see our year over year at least dollar origination volume improved from last quarter's 18% down to flat year over year this quarter.
Additionally, we are up over 20% at least dollar volume quarter over quarter overall, despite the credit tightening.
Our partnership lease business is up over 55% year over year, and 22% quarter over quarter, driven by an increase in new door fronts, which we expect to continue to see through the rest of this year.
Regarding our marketplace lease business lease volume is down year over year with the decline in approval rates from a credit tightening.
However, we stellar volume from the marketplace is up 21% sequentially from last quarter.
Being fueled by higher new customer volumes, even despite our credit tightening.
This sequential growth is happening for a few reasons.
Our marketing team has made significant strides in adding efficiency to our user experience are customizing, our messaging improving our re targeting programs and a more sophisticated segmentation scheme.
Hansen online recommendations through suggested purchases and onsite search recommendations.
As a result of this as a result of this conversion rates defined as approval approved customers with purchases are significantly up year over year.
Additionally, customers, who purchase are using more of the credit granted as demonstrated by a 25% higher average order value from last year.
These efforts are resulting in an offset of the lower approval rates by our tightening of dramatically improving efficiency within our sales funnel.
As we look at early trends in Q3, you're seeing positive year over year lease comps in both our partnership and marketplace channels in July .
You're also seeing healthy repeat customer engagement within our marketplace.
Important from a credit quality perspective, as repeat customers repay at a better rate than new customers.
We are observing increasing repeat rates with a higher percentage of new customers, making subsequent purchases all our marketplaces this quarter compared to last quarter.
We are constantly monitoring payment performance and making adjustments as conditions warrant.
The advantage of our lease product as we quickly see improvements or deterioration in credit performance in comparison to the slower feedback loop with credit cards auto loans or mortgages.
This allows us to quickly adjust credit policy as conditions worsen or as conditions improve with more timely performance measurement.
Additionally, the investments we made in our decision science team are paying dividends as new underwriting tools are quickly deployed with the latest data, making our underwriting strategy more targeted than before.
Being able to both grow revenue while at the same time, keeping credit quality stable is a key goal of the team.
Turning to our lending initiative originations were up significantly from last quarter.
$9 million in Q2 versus $5 million in Q1.
As is the case with our lease business, we continue to be very prudent in our underwriting standards for the loans business.
Our decision Science team has also been hard at work and building new risk and marketing tools to be able to further grow this business profitably.
Loans have a large addressable market is this product expands a type of retailer we can do business with you on the seller of hard goods.
You're also able to effectively leverage our operating platform minimal increases to our non marketing SG&A expense to manage and grow our loan strategy.
We plan on growing this channel cautiously keeping both acquisition costs and credit risk in check.
As we grow through the rest of this year.
In summary, you're seeing improving dollar volume expansion of both our loans and lease businesses. While at the same time, keeping a tight underwriting standard in place to guard against the impacts of inflation on our customers.
As we continue to optimize our user experience, our modeling and statistical tools and we expand our distribution networks to both lease and loan products.
We will be well placed to take advantage of an uptick in consumer confidence as inflation decreases.
With that let me turn the call back over to rich.
Thanks, John .
Closing I would like to summarize our strategy, which can be defined as.
Profitable growth with a disciplined view of credit risk.
The management team understands we continue to operate in an uncertain economic environment.
We will continue to closely monitor our customers.
[noise] behavior.
We believe diversified lines of business will enable us to grow in the future.
Irrespective of the economic environment.
For a long time or Omnichannel approach to leasing has provided some diversity.
Additionally, as Joe.
John mentioned, our new lending initiative opens up a new Avenue for growth.
Finally, the newest source of source of profit growth is our retail sales initiative.
This initiative is built on the rec partnerships with manufacturers and distributors, who provide us merchandise at wholesale prices.
We sell these products at retail prices and capture the retail profit margin.
Obviously, <unk> shopper dot com as the retail environment and overtime, we have become proficient at online retail marketing.
Historically, the vast majority of our profits from the marketplace have been derived from the earnings we make from the lease transaction with very little profit from the retail margin.
Like shopper has great relationships with our existing retail partners.
Support us with access to inventory and delivery to consumers and we support them through creating incremental sales.
In many cases, our retail partners have unique or hard to find items that our customers would not be able to access otherwise.
We plan to continue growing and nurturing.
Those relationships.
However, there are many items that are bit more common such as furniture bedding jewelry et cetera.
We currently have a relatively small penetration rate in our marketplace for these types of consumer goods and we would like to fill that gap.
Over the past year, we have put together a small team of experienced retail professionals.
Focus on this initiative.
And we have signed over 40 wholesale partners.
Selling the products provided by these partners greatly increases the retail profit margins reflect shop, making our marketplace a more profitable investment for the company.
In the second quarter, we began testing the sale of these products on the market place and the initial results are promising.
Like lending this retail line of business is complementary to what flipped shopper has done in the past and therefore does not require a significant incremental investment.
In conclusion, we strongly believe diversifying our revenue streams through complementary business lines, which now include leasing lending and retail sales creates a scalable platform for the continued growth growth of flex up.
Thanks for your time.
We are bullish about the opportunities in front of us and what they mean for the company and its shareholders.
We're now happy to answer any questions you may have at this time.
Thank you Sir ladies and change then we would now be conducting a question and answer session.
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Yeah My place to talk to you guys like to remove yourself from the question Kim.
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The first question comes from Scott Buck of.
C wainright.
Good afternoon, guys. Thank you for it or good morning, I guess, thank you for taking my questions first Russ do you mind running through those numbers again on store counts, where where you are in and where you'll be at the end of the year.
Sure no problem at all.
The started the year.
With about 250 doors are expect to add about a 1600 or so and ended with about 3000 active doors.
And then I mentioned additional current partner.
Where we're expanding with our loan program and will add another 500 doors by the first quarter of next year.
Okay. So we're basically looking at E.
The triple the store count at a year from now right 35 versus 400 or so.
That's great Brian do you do you mind talking through you know kind of individuals' store economics, I mean, how should we think about the value of each incremental door that that you guys that.
Do they generate X X number of leases a year I mean, what's the.
You know, what's the right way to think about it.
Sure from our perspective, its you know being an active door requires at least one.
Lease per week.
We should think about each of these doors as adding a at least.
$5000 in leases per hour per month.
Okay.
That's very helpful and then turning to the loan product.
Oh, a real meaningful jump sequentially, which makes sense given the kind of wider role what's the longer term opportunity I mean should we expect growth like this over the next several quarters or you know.
Do you are you at quarter end, you tap the brakes and kind of see how things go and you know.
I guess, how do you control the growth here.
I'm going to hand, this one off to John Davis, Yeah, Ah, Yeah, Hi, there.
The percentage increase from Q1 to Q2 was certainly significant while we see growth.
From the you know the 12, some odd million dollars we originated in Q2.
It won't be at the same.
<unk> you know if it will grow in conjunction with the increasing door count because what we're going to do is deploy both lease or a loan depending on the kind of retailer that we have so as it grows it will it will.
<unk> increase from current levels, but it won't be at the same sort of percentage increase you saw in Q1.
Let me add a little extra context to that.
And as we have mentioned we started this lending program.
Well over a year ago, and we were in testing for quite a while.
We got comfortable with the lending program and accelerated into the second quarter.
This year as we as we mentioned last quarter.
As I spoke about a couple of times in the prepared remarks.
We are in an uncertain economic environment.
So while we want to expand in conjunction with our storefronts as John mentioned, we're also keeping our eye on the economic environment and closely monitoring the early results.
Of any lending we do.
So we.
We are going to continue to grow we think we'll continue to have a good results, but we will be operating under the capacity level, we would be able to operate under a in a more normal economic environment.
Great. That's helpful guys and then last one for me if you could just remind us how given the environment. We're in how quickly you are able to adjust underwriting standards.
Hum on both the loan and the the lease product.
Yeah No. This is John again.
From a technical perspective, where we have a lot of.
The ability to be very nimble when it comes to enacting new credit policies.
The enhancements to our decision Sciences team have also allowed us to quickly rebuild statistical tools credit models et cetera to take advantage of the most current data.
You know from reacting to the macroeconomic environment will be cautious you know we have seen what looks like some moderation in the increase in inflation very recently, but its still I think way too early to.
To react to those early data point, so we'll continue to monitor.
Credit performance as we go through the next few months.
As I mentioned in our in my prepared remarks.
The the lease and loan products provide fairly quick you know credit kpis that do allow us to be more nimble in making changes versus a credit product that takes a lot longer to evolve.
So we can react quickly, but we're still gonna be fairly conscious cautious since observed conditions over the next few months, let me I think John you did a great job of answering the question that Scott asked let me answer a question you didn't ask Scott which is.
Once you make those changes how fast can they really make an impact.
One of the features of our lending and lease products as they have a relatively short duration.
So once you do make a change is in this case, we've been tightening.
The credit policy.
You began to see within a relatively short time period.
A pretty good impact on the overall performance of the.
Total portfolio because of the short duration of each asset that we produce with any loan or a new lease.
Great that makes sense, guys, I guess I'm going to sneak one more in here in terms of your underwriting standards I know, we're tighter than we are we were a few months ago, but you know when we put some more historical context around it I mean is it.
Where are you versus pre Covid, where are you versus the last.
No.
A significant macroeconomic.
No.
I Dunno recessions is the right word, but yeah last time, there was a significant macroeconomic pressures on the business.
Well, let me answer the latter question because that's easier and then I'll turn the harder question over to John and give him. Some time to think about that and this company hasn't really been through.
Previous.
Assertion so to speak right.
Right.
So to compare it back to say the last time, we saw a significant impact like this I was at another company dealing with this with so they get out of the financial crisis. So we really cant answer that question, but I think John probably and give you a feel for the relative.
Tightening level, if you will where we are now versus pre COVID-19. So Jon I'll turn that to you yeah, No I think if you.
Could index you know the level of tightness. If you will we havent been this tight since the very beginning of the pandemic in Q2 of 2020, where there was a ton of uncertainty around what was going to happen with the U S consumer and economy shutting down so.
Where certainly tighter than we were pre pandemic, where almost as tight as we were at that very beginning of the pandemic before we had visibility of what was happening. So we are certainly very cautious in our earning underwriting standards, which is why I'm, especially pleased to see sequential growth in our lease.
Despite having those credit levels.
I would say that for.
For those of you who have followed the company for a while.
Kim here in the fall of 2019, and one of the first things. We did if you look back at.
Conference call transcripts et cetera, as we did some tightening.
At the end of 2019, and I would say that where we are now is roughly equivalent to where we were at that point in time.
Okay.
Great well I appreciate the additional color color guys and congrats on the quarter.
Thanks. Thanks.
The next question comes from Michael Diana of Maxim Group.
Rich welcome back.
Thank you.
I just wanted to make sure I understand what youre, calling retail.
So from what you said I think it's it's a lease product, it's mainly through your marketplace channel and you're really going beyond consumer.
Tronox into things like furniture jewellery and all is.
Or are there other things right and is am I, leaving out some important things.
I think maybe.
That requires a little more clarity on my part.
We operate flagship or dot com, which is our marketplace and as our retail presence and obviously, we have retail partners.
All of that marketplace.
And.
Historically, most the vast majority of our profitability.
From the marketplace has been through our lease economics are retail or retail or sell something we offer the lease to the consumer we buy the product we released it to the consumer and we get the economics from from leasing.
We over time.
Have tended to have a penetration rate more on.
Electronics, and especially good such as that.
Obviously, the United States retailer.
The United States consumer consumes much more than just that and we wanted to fill some gaps.
So we.
Have we started studying this about a year and a half ago.
And we wanted to move into some more common products such as.
Household goods bedding and furniture, even jewelry et cetera, where we had limited.
Volume on our marketplace.
Rather than doing that.
Well, what we've chosen to do.
As we.
Partnered with wholesale partners.
And we are buying directly from those partners.
At a wholesale price and then marking up.
The retail price.
Which enables us to capture the retail margin.
Like a normal retailer would.
So in this case this new line of business, which we just just launched that we've tested.
With some degree of success in the second quarter enables us to.
The rise of profitability from the retail sell itself.
As well as the profitability from the lease that finances that retail sell.
Does that makes sense, yeah of course and are you doing it for your existing consumer electronics or is this just for these <unk>.
New products yourself.
It's primarily for the new products for the for the new products I mean the.
No.
The products, we're selling with our existing partners in the retail and the electronics space.
That that business is going very well and we're going to as I said in the prepared remarks, we're going to continue to nurture and grow those relationships. Those are working very well for us and we're very pleased with that and our partners seem to be very pleased as well.
Okay. So I guess, what you're saying on the newer.
Endeavor, the margins should be bigger.
We are testing in the case that are in the future, we should be able to capture more retail margin.
All of our marketplace that is a.
Our relatively new endeavor. So we don't have any further insight as to how large that could be but it is something that has.
Evolved to the point, where we thought we would speak about it as a diversified line of business.
Okay, Great. That's that's very helpful. Thank you.
Yeah.
Yeah.
Yeah.
Ladies and gentlemen, we have reached the end of our question and answer session.
I'll now turn the call over to rich house for closing remarks.
Well. Thank you everyone for your time this morning.
Look forward to speaking to you next quarter.
Thank you ladies and gentlemen that concludes today's conference. Thank you for your participation and you may now disconnect your lines.
Yeah.
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Yeah.
Okay.
Yes.
Okay.