Q3 2022 Katapult Holdings Inc Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Caterpillar Q3, 2022 earnings call.

Now I'd like to turn the call over to Bill right head of Investor Relations. Please go ahead.

Thank you and good morning, welcome to kind of hold third quarter 2022 earnings results Conference call with me today are aligned desired Chief Executive Officer, Chris <unk>, Chief Financial Officer, and Derek Midland Chief Operating Officer.

We issued our earnings release 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, we will all 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 on future financial performance, the timing and gross origination and scale potential of our exclusive partnership with Sears.

Adoption and success of our mobile application and virtual credit card solution catapult pets.

And anticipated occurred timing and impact of impairment levels and prime lending tightening.

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 Form 10-Q for the quarter ended June 32022, and the subsequent periodic and current reports we file with the SEC.

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 constitutes non-GAAP financial measures under SEC rules.

These include measures such as adjusted gross profit adjusted EBITDA and adjusted net loss.

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 web.

Cast will be available for replay on the Investor Relations section of our website I will now turn the call over to Linda.

Thanks, Bill good morning, everyone and thank you for joining us on today's call. We will review the results of the third quarter of 2022 and provide an update on significant progress, we're making on our strategic growth initiatives.

Turning to slide four you can see that our team continues to work diligently to create value and to capture additional share in the large virtual lease to own addressable market.

We have only scratched the surface of the total ecommerce durable goods market opportunity for underserved customers, which we estimate to be about 40% to 50 billion.

While we are not immune to the ongoing macroeconomic pressures we are confident in our ability to weather. These challenges over the longer term and remain focused on progressing our strategic plan in order to create value for our shareholders. During the quarter, we executed several aspects of our strategic growth plan, we successfully launched our mobile app and <unk>.

Paul.

Our virtual credit card solution. We also completed our planned strategic hires for the third quarter of 2022, and our new team members are quickly getting up to speed and making contributions including the optimization of our sales process.

This is already bearing fruit.

I am pleased to announce our exclusive partnership with transform XR Holdings management, LLC, which operates multiple stores and online formats, including Sears hometown, Sears home appliance showrooms, Sears home and life and Sears full line stores as well as Sears Dot Com <unk>.

<unk> selected a series exclusively purchased solution from a competitive bid process is very exciting and allows us to expand in both ecommerce and omnichannel space with a national retailer. We look forward to integrating with series online E Commerce site and there were 140 store fronts in the coming months.

And we believe we will see meaningful gross originations from the partnerships starting in 2023 and beyond.

Additionally, we are pleased that our net promoter score continues to be high and that 46% of gross originations during the quarter were from repeat customers. We are proud to continue providing underserved consumers with a way to access goods that they need in their daily lives, especially during these challenging times turning to slide five you will see we.

Continue to execute our strategic growth plan that we first detailed on our fourth quarter 2021 earnings call. We have in fact achieved almost all of the goals that we set for ourselves at the beginning of the year, including filling key leadership positions optimizing our sales process, introducing new marketing and brand initiatives and law.

<unk> new products, we expect these initiatives to pay dividends going forward.

Our work to add new merchants is always ongoing we believe we are gaining momentum as retailers come to understand the value of partnering with catapult.

Slide six provides additional details about our new product catapult.

Which is powered by our newly launched mobile App, we envision that our mobile App will become the main way that our customers interact with our brand going forward.

The beta version of this App launched during the third quarter and since then we achieved 30% customer adoption largely through E mail campaigns and word of mouth.

The mobile App allows customers to get preapproved self service release make lease payments and most importantly utilize our proprietary catapult pay product.

<unk> pay is our one time use virtual car technology that makes lease purchasing simpler than ever for our customers through our mobile app customers can complete these transactions with select existing merchants and affiliate merchants and checkout with a virtual credit card that can be entered like a regular credit card at checkout.

We currently have 20 merchants enabled with catapult.

Including desktop mattress firm Traeger Grill and HP.

To date since our soft launch beginning of September we have already originated over 2000 leases and over $2 million in gross originations with capital.

The success of the soft launch is very encouraging and we plan to continue to grow this new origination channel in Q4 and into 2023, as we add more catapult pay margins each quarter as well as leveraged strong analytic capabilities to improve our app engagement and conversion plus began to build out our affiliate revenue.

Work.

Moving to slide seven we continued to steadily add to the number of retail partners each quarter, most notably we launched two enterprise clients, one stop bedroom and simple tire both of which are competitive wins during the quarter. We also entered into agreement with <unk> power, a leading e-commerce merchant for high.

Performance custom gaming Pcs.

As our exclusive new partnership with Sears. We are currently working to complete both an online integration and support their ecommerce business as well as full custom integration and the existing in store point of sale system for rollout to their 140 plus stores across the U S.

Additionally, under the partnership shoppers, who apply but do not qualify for credit through the Sears Prime financing provider both in store and online will automatically be considered for eligibility to receive a catapult lease purchase preapproval offer.

We are very excited to partner with Sears and you have non prime consumers access to leading retailer and a pioneer in customer focused brands like Craftsman Kenmore and diehard.

Together, we intend to seamlessly connect the digital and physical shopping experiences to serve more customers and shop your way members.

<unk> ability to understand the needs of <unk> and its affiliates, while being nimble enough to customize a support fast integration played an important role in the decision of both sides Department gather.

We believe that Sears has potential to become one of our top merchant partners in 2023.

I would now like to turn it over to Chris Our CFO , who will provide more details on our financial performance Teresa.

Orlando as detailed on slide eight third quarter results reflect the ongoing challenging macro environment for both retailers and consumers, which again resulted in decreased origination and weighed on our key revenue drivers Chris originations for the third quarter of 2022 were down $16 9 million.

Total revenue for the third quarter of 2022 was $53 million.

The $21 $4 million decline in revenue $5 4 million relates to the adoption of ASC 840, <unk>, which is effective January one 2022 and as discussed on the next slide.

Gross profit was down $6 5 million year over year due to a decline in origination volume lower margin and from the adoption of ASC eight ponytail.

Adjusted gross profit was down <unk> 3 million and our net loss for the second quarter was $8 8 million and adjusted EBITDA decreased $2 4 million.

Turning to slide 10, overall operating expenses were down $4 4 million year over year or 21% of total operating expense decline of 454 million included the elimination of bad debt expense due to the adoption of ASC for retail.

Set by increases in professional and consulting fees and compensation costs related to an increase in head count in connection with our strategic investments for growth.

With the launch of several of our significant initiatives completed we anticipate lower operating expenses for the full year 2023, as our growth initiatives recently and as we look to continue lowering operating expenses across the organization in light of the challenging macroeconomic environment.

Turning to slide 11 impairment charges related to a property held for lease as a percentage of gross originations was 10, 1% in Q3 of 2022 lets reflect a return to pre pandemic levels due to continuing economic pressures being felt by our consumers.

The significant increase in inflation, we have seen this year, coupled with an absence of sitting on time as negatively impact our customers and in response, we have continued to tighten our underwriting model throughout 2020 here and based on our current vintage data, we anticipate our impairment charges as a percentage of price originations to decline for Q4.

It is worth noting that as credit tightens across the credit spectrum, including Prime lenders, we anticipate that new higher income customers will seek out our offering widening the top of our application file.

We have not yet seen meaningful tightening from the prime lenders above us we anticipate the tightening actions. So eventually occur.

I will now turn the call back Opex of Orlando to wrap up with some key takeaways. Thanks Marissa in conclusion, despite turbulent macroeconomic conditions, we believe our progress against our strategic growth investments. Thus far is paying dividends with the addition of larger retail partners across diverse channels, we continue to conservatively manage.

Our underwriting strategy deepen our relationships with existing customers add new retail partners and launch new product capabilities. As we look ahead, we remain confident that our company is well positioned to add market share and a large virtual lease to own addressable market.

Thank you all we will now take your questions.

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Okay.

The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if any point you would like to withdraw from the queue. Please press star one again.

You will be provided the opportunity to ask one question and one further follow up question, we will take a moment to render our roster.

Your first question comes from the line of Josh Ziegler from Cantor Fitzgerald. Your line is open.

Hi, guys. This is <unk> on for Josh Thanks for taking our questions. So you mentioned that you have not yet seen a tightening in underwriting from prime financing providers, even though our impairment charges seem like they're back at pre COVID-19 levels could you add a little color there around what youre seeing around consumer health and maybe when we could see a tightening from the prime guys.

Yeah.

Yes. This is curtis in terms of the crime tightening we have not seen a significant.

Trend yet in terms of prime tightening theres a lot of macroeconomic data that's coming out that.

Leading us to believe it will come in the near term, but we have not seen it and is that reflected in our numbers, especially in Q3.

From the impairment perspective, we have been underwriting obviously throughout the entire year and with the latest vintages. We are seeing positive trends in terms of delinquencies and Thats why.

We believe the impairment as a percentage of property held for lease will be declining in Q4.

Gotcha. Thank you Christa thinks about some color there and then also wanted to touch on the tiers partnership which is really great to see can you help us maybe size the opportunity a little bit there what level of penetration do you think you can reach with the partnership.

Thanks for the question as Orlando.

I have a lot of experience a series of was a client of mine before obviously, a lot's changed in the last few years.

But their customer is very least forward driven.

Especially their hometown stores, which we're real excited about because their hometown stores are in small.

Small towns where the.

The owner as a franchisee or possibly and they really focus on trying to help that customer and bringing the customer that we like so we think that the penetration rate will be really strong probably one of our strongest because of the type of customer that they draw as well as.

The market that they have and the reputation that they have with their customers who continue to go back to them time and time again. So we're actually really excited about this opportunity because it really does fit.

Perfectly with our mission.

Helping these customers got high quality merchandise.

Our strong retailer so I don't know exactly what the numbers will be but based on my previous experience.

They are really strong and we're real excited about it.

Your next question comes from the line of Vincent <unk> from Stephens. Your line is open.

Hey, good morning, Thanks for taking my questions.

So following up on <unk>, so that's very exciting to hear that.

I was wondering if you could talk through how.

Bob.

In order for this to be illustrative.

That sales cycle went the exclusivity that's pretty.

Pretty pretty nice to have and.

Essentially also the competition.

Because I'm sure others maybe.

We're competing against that so.

How are you.

Catapult was able to win that and what were the differentiators. Thank you.

Yes, Thanks, Vincent nice to hear from you.

It was a long process, let's just set.

I think we first talked to them early.

Part of the year.

Their their current provider was basically shutting down and gave them two weeks notice. So they had to move quickly. Unfortunately, it's still a big company and they didn't move as fast as we wanted them too because that was ready to start leasing in April .

And I think we are the differentiator was.

Because they did and this is what took some time they did shop to see what's the best alternative out there and what they really liked is our tech and they realize that having no checking account, having the integration points.

And we really had numerous calls with their tech side and our tech side to talk about how easily we can make the integration, especially on where Sirius dot com and shop your way programs and then on the in store again.

They had.

Look at integrating into the Pos system.

And we've done that before and so I think we eased the decision for them because we know we were talking about and we knew we could do it really quickly and easily.

Okay, perfect and so are they fully turned on already or is there still a integration office to go still in integration process, because there's literally three integration points. There is the <unk>.

Pass as much as you can imagine.

Relatively old Tof system.

There is the shop your way, which is our loyalty program and then Theres Sears Dot com, So theres literally three integrations going on right now.

Okay, Great and then maybe.

Thanks.

Expanding a bit or are kind of pulling back a bit but.

The discussions you're having with your merchants now and no perhaps ahead of the holiday season holiday.

Maybe positioning and how you can help and then for the pipeline that you have had.

Yes, things changed and maybe more engagement or more urgency.

That youre seeing from your merchants and potential merchants. Thank you.

Hi, Vincent this is Derek thanks for the question.

What I'd love to say or what I would like to share is that the pipeline is really strong and enacted then even being in Q4 we.

We believe that with the revamped branding that we've done the new CRO addition, re Bergen and a lot of the new product enhancements and integration capabilities that we've been working on are really resonating, especially during a time when many retailers are looking to expand our consumer base and grow sales and so we're really optimistic about the traction that <unk>.

We've had.

Over the last few quarters, but also going into next year.

That's going to continue.

Continue going forward, yes, Vincent if I can add.

I've been out talking to a number of retailers both current retailers that we have as well as potential new retailers in the last few months and it's interesting because I've been hearing the same story for most of them is they had the shipping issues.

Back in 'twenty one.

They over ordered because they were trying to make up for it now that you've got a lot of inventory and they've got a lot of inventory to move so I'm pretty excited about.

The engagements that we've gotten so far because they've got move inventory and when a retailer needs to sitting.

Is sitting on a ton of inventory they want to move if they are looking for alternatives and they know that we can move fast.

Okay. That's perfect very helpful. Thanks, so much.

Your final question comes from the line of how goats from loop capital. Your line is open.

Hey, good morning, guys.

I got a quick question.

On the new virtual product.

A little bit about the vendor.

Vendors involved and maybe some early indications on average order size.

Maybe early loss rates with this new product.

Hi, Al This is Derek thanks for the question, we're really excited about what we're seeing from the mobile App and then catapult PE product that we've launched this is something that we've been working on for some time really with the aim to respond to what we're hearing both from retailers and from consumers about how can we make the customer experience better how can we.

We open up.

The opportunity for repeat transactions and recurring and higher engagement as well as.

Given for catapult the capital Committee, a larger set of retailers to.

To respond to so just it's.

It's early days I will say that and just in general we've really only had this out in the market place for about 70 days.

The early numbers that we're seeing are really exciting.

Just in terms of average order value of our consumers are behaving just like they have been in other form factors and in the digital experience, we were already mobile enabled and mobile forward thinking, but with the mobile app and this new capability, we're seeing very similar sort of.

Customer behavior.

But what's really exciting is to see the level of engagement.

The higher and faster repeat rate as well as the encouraging signs as they're finding new buying opportunities from new SKU category. So someone who may have came in.

A.

A mattress with US and is now very easily able to find a purchasing option at a best buy or add a tractor supply or at something similar to that so we're really excited about what this means for us and.

We've been able to leverage our AI, driven systems and platforms and as virtual card technology to create a new and easy purchasing path for consumers.

We are excited for what that means for 2023 and beyond.

If I can add one thing Derrick forgot to add I forgot to mention is that we really havent told anybody else. This is the first public announcement about it and it's just customers that have been using our app to make payments in <unk> discovered it and we were surprised that the engagement and so now that we're kind of through the beta test.

And market 75 days is mostly our repeat customers, so we're going to carefully and to other.

Other customers that we don't know.

But we're excited about just the customers that we know being able to access a host of different products that we might not have been able to offer them before.

Is it done over like a traditional network rail's with a virtual card issued by a.

I know like Marc Cadieux or something.

Is it.

Visa branded card with some toward amount.

Set to a certain S. ICD code for the kind of product that is leasable tell us about those details those kinds of things.

Yes, hi, how great great question. So it is similar so what we're really trying to solve for one or two things was that.

One we wanted to make it really easy for our consumer to shop.

Our marketplace to be able to access great merchants and great quality.

Items and.

And what we're finding is that our conversion rate could improve if we could lead a customer through that processes and give them all the tools to understand that.

How the lease would work and to have a transparent flow without having to leave our site.

Yeah.

Go somewhere else and so that was one of the things that we were able to solve for by having a virtual card, but yes, what it enabled us to do is to display the properties of the lease the terms of the leased all of the pricing options clearly to the consumer they can understand that shop and checkout and the final step the checkout.

As to us.

These are mastercard branded card and complete that transaction seamlessly in the checkout.

Just like they would with any other payment transaction, we've got excellent both AI controls as well as traditional truck controls like youre mentioning.

To limit and reduce the fraud exposure there and so just make it a seamless experience for the consumer and so we still believe that are directly integrated account is a great way and that's the best consumer experience.

Extremely smooth and friction less this falls very closely after that and allows the customer to have a highly engaged and our repeat transaction very quickly.

Derek was being a little humble and talking about our technology, because if you think about the <unk>.

Retailers that we have there are a lot of things that best variety that you can't lease if we follow regulations, which we do.

And that was part of the build was making sure that it's items that people can lease.

We can obviously avoid fraud and make the transaction seamlessly I remember Derek called me and he said well I just went through the process because thats really smooth and it is and so we're pretty excited about it and obviously our customers are using it now without even telling them. So we believe that we've got a great opportunity.

<unk>.

Okay. Thanks, a lot.

Thanks Al.

Your final question comes from the line of Anthony to comeback from loop capital markets. Your line is open.

Good morning, Thanks for taking my questions just a few.

Quick ones.

I guess my first one you mentioned with the mobile App, you said theres, 30% customer adoption.

Can you just sort of give some context on that I didn't understand exactly what you meant by 30% customer adoption like 30% of what essentially yes.

So Anthony we thanks for the question. This is Derek again, so since we launched the mobile App This summer.

We just made it available in that in the stores.

Mobile marketplaces in stores.

And you just started adding the tag to a couple of our communications, but but no big massive campaign, while we saw very quickly where a couple of data points are really interesting. So about 30% of our active customer base has already downloaded the app applet application and is using it monthly so that number larger if you would go.

Beyond just <unk>.

Initial download but these are this is active use.

And we've seen that that continuing to grow month over month, and then one of the other data points. That's really interesting is that we're looking at how theyre interacting with the App and what we've seen is a significant shift in and payment behavior.

From a traditional call in or a log into the customer portal to pay but they are paying through the app and we just believe that.

Our customer base, we knew that they were mobile first we knew the types of devices and how they are engaging with us and the mobile App has just enhance that and were seeing regular and recurring engagement and interaction with our brand and with our sites.

And all of that with basically no marketing effort to date.

So we're excited about what that means in the future in terms of our way to stay even more connected to our customer base.

Got it Okay. No. That's helpful. Second thing in terms of fears I think Orlando mentioned that they were franchise stores.

So I guess my question then becomes like does each franchise store have too.

AD.

Your lease to own solution like <unk>.

This is going to be rolled out across all stores with each store get to decide each franchisee gets to decide whether they want to integrate it or not.

It is more fully rolled out when we get the integration complete all of the stores will have access to it now it's going to be up to us to visit the stores and get them.

Familiar and encourage them to use it but.

In my experience. These stores are highly engaged and we got on a phone call recently with the head of the hometown stores. She was incredibly excited about it because they had a program before.

There were good users.

And so I think adoption is going to be easy, but no. We don't have to have each store sign up.

Got it Okay and then just one last question any color on on your wafer business obviously.

They are having their challenges.

Yes.

There's still a great partner, we I was up in Boston, a couple of weeks ago.

They love our partnership.

Yes, they are having their challenges apps are down you know obviously, we've tightened up.

As everybody else has.

They want more business. So we've had some good discussions and good plans set up some plans around how we're going to market the program to their customers.

How are we going to underwrite the customers better we're really.

Focused heavily on the partnership obviously, we want to continue it but they are extremely happy with our partnership so.

We have we have to go along with them ups and downs, but.

They are working really hard to drive volume they just sat away to a couple of weeks ago.

They are looking forward to the holiday season, and we're trying to help drive that business as well.

Thank you ladies and gentlemen.

This does conclude today's call. Thank you for your participation you may now disconnect.

Okay.

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