Q3 2022 FlexShopper Inc Earnings Call
Greetings and welcome to the Flex shoppers 2022 third quarter financial results Conference call.
At this time all participants are in a listen only mode.
A 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. Please note. This conference is being recorded I'll now turn the conference over to your host Carlos Sanchez from Investor Relations you may begin.
Thank you and good morning, welcome to flex shoppers third quarter 'twenty 'twenty. Two earnings result conference call with me today are Rich House, Chief Executive Officer, 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 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 future financial performance. These should be considered in conjunction with <unk>.
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 third quarter ended September 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.
The 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.
Net income.
And adjusted net income these non-GAAP financial measures should not be considered replacements and should be read together with our GAAP results reconciliation to GAAP measurements 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 rich.
Thanks Carlos.
Good morning, everyone and thank you for joining us for the flex shop or third quarter of 2022 earnings call.
Once again I'll be joined by Chief Financial Officer, Russ Heizer, and the Chief operating Officer, John Davis.
In the third quarter, we reported an EBITDA loss of $2 9 billion.
And our net income loss of $6 $3 million.
In a moment Russell walk you through a more detailed review of these financial results.
It.
Here's the current macroeconomic environment is affecting the growth opportunities in our business more severely than we observed earlier this year.
Apparently the high inflationary environment.
With slower economic growth has impacted the demand for discretionary purchases.
The traditional fly sharper customer.
In the third quarter, we observed a combination of lower response rates to our marketing initiatives, coupled with an unfavorable risk or distribution of those consumers who did respond.
Simply stated we were attracting fewer new customers in our direct to consumer initiatives and the consumers. We did attract demonstrated a lower credit quality profile.
The credit profile of these consumers resulted in a lower approval rate using our underwriting criteria.
Last quarter, we told you we had proactively tightened our underwriting standards in order to deal with a declining economic and economic environment.
We did not tighten any further in the third quarter. The assets. We are generating are proving to be sound investments.
However, because of lower response rates and lower approval rates, we are originating less of these assets than we anticipated.
The bright spots in our business are proving to be the assets, we are generating through our retail partnerships and our repeat customers.
Retail partner volumes are up 20% year over year and the repeat volumes continued to grow.
Fortunately the pivot to increasing our storefront partnerships that began earlier this year. These into the areas of our business that are currently performing well and we believe that will drive future growth.
John will provide more detail regarding volume and credit quality a bit later in the call.
After the update provided by Russ and John I will provide an overview of our immediate strategy moving forward.
I will now turn the call over to Russ for a review of our financial results.
Thanks, Rich our third quarter financial results reflect the challenging operating environment as our customers continue to manage these inflationary conditions.
Fortunately, our new growth initiatives focused on the brick and mortar channel are still on track to finish the year with more than 3000 storefronts as we've previously indicated.
As our retailer partners face their own headwinds to demand our storefront installations are not yet maximizing throughput. However, we still expect that originations were more than double what these installations are in place and optimized.
In the quarter ended September 32022, total fundings increased 61% and $25 8 million from $16 1 million for the same period last year.
Total revenue for the third quarter of 2022 was $26 1 million, which was down 15% year over year.
Gross profit was $6 4 million are down 50% versus the same quarter last year.
General and administrative expenses, which includes operating expenses and salaries and benefits were $8 5 million, which is $1.5 million higher than same period last year.
Since October of this year D&A has been aligned to the current economic environment and these G&A expenses are now in line with last year.
Adjusted EBITDA was negative $2 9 million, a decrease of $7 8 million year over year.
I'll now turn it over to John discuss our operations in more detail.
Thanks, Russ economic conditions remain challenged for our customers.
Customer inflation.
As measured by the consumer price Index has plateaued in June of this year. It has not yet moderated and it's holding at an 8% annualized rate at.
At the same time hourly wage growth is approximately 5%, which is resulting in deterioration in customer disposable income.
Unemployment rates remain low.
The significant increase in short term interest rates are predicted to slow down economic growth in the future which puts future.
Employment levels at risk.
This economic backdrop has restricted the spending activity of our good customers as they rationalize their personal balance sheets, which has resulted in a slight drop in overall lease originations year over year with a one 9% decline.
When split between our marketplace and partnership channels, our marketplace originations were down over 20% year over year.
Originations were up over 20% year over year.
As a reminder to those listening we originate leases through our proprietary marketplace that can be found online at flex shopper dot com and through point of sale retail partnerships.
As a secondary financing option for those customers.
Addressing our marketplace channel first our underwriting standards remain significantly tighter this year in comparison to last year.
Marketplace application volumes are down 5% from last year, but approval rates this year, our 52% lower than last year as tight underwriting standards remain in place.
We are also observing some deterioration in the applicant credit quality as measured by generic credit scores that we obtained during our underwriting process, which is also contributing to lower approval rates.
Despite this quality drift in our marketplace channel are tighter standards do appear to be effective based on our early default rate trains trends, which are 18% better year over year, even with the significant difference in economic conditions.
We will continue to be prudent in our approval criteria in order to maintain these default rates, which are a good early indicator of the eventual return on mature originations.
As we continue to keep lower year over year early default rates, our bad debt reserve ratio will follow as these vintages season into the calculation.
We also continued to experience nice average order value growth stronger year over year conversion rates on approved applicants and strong repeat customer and leasing rates, which are partially offsetting the much lower approval rates we were experiencing.
Maintaining asset quality has never been as important as it is right now in the history of the company and we will remain cautious as we observe how consumer prices unemployment rates progressed over the short term.
We also at some point expect better credit quality customers to come to flex shopper in the future as credit availability with lenders above us in the credit spectrum tightened the standards, we have not yet observed this though and are managing our underwriting standards assuming that this is not going to occur in the short term.
Moving onto our partnership channel, we are benefiting from more origination volume from our recent door expansion as well as higher volume from established partnerships.
Even with slightly lower approval rates year over year within our partnership lease channel, we're seeing 11% application growth and 23% year over year growth in average order value.
We continue to have a strong pipeline of new storefronts that will drive future revenue growth.
Also importantly, we are seeing 10% lower year over year early default rates. So we are comfortable with the asset quality and the growth we are seeing within this channel.
The future expected growth in door counts as well as trends we are seeing within existing partnerships. We expect that this revenue growth will continue while maintaining favorable credit quality.
Looking at our loan Bank partnership product our bank partner originated approximately $10 million in Q3 of this year versus approximately $400000 last year in the same quarter. However.
However bank partners originations are sequentially down from the approximately $13 million originated in the second quarter.
Like all of our other originations and purchases we are being very vigilant on our underwriting standards and are prioritizing asset quality above revenue growth and the current economic environment.
Similar to our lease products. We are also seeing success with this strategy within the loan product with early paid default rates on loans originated by our bank partner in Q3 lower than both Q2 as well as Q3 of last year.
Well some of the new partnership marketing deals recently announced there will be opportunities to grow the loan product in the future.
This will be done in a way that continues to preserve asset quality of what is being currently originated or purchase.
Lastly, we are making progress on our retail strategy last quarter, Rick spoke about introducing products on flex shopper dot com sourced from manufacturers and distributors to make with the retail margin as well as our traditional margin on our product financing.
It's just started to roll out onto a marketplace with a 5% balance of sale at retail margins in the high 30% range in Q3.
We are selecting products that are complementary to our existing marketplace partner selections, which allow our customers to utilize their approved spending limits more fully the wider selection of goods.
This additional margin has the potential to be a powerful improvements in profitability as the volume of these sales increases and becomes a larger mix of overall revenue.
In summary, we will continue to prioritize asset quality over revenue growth as economic conditions remain challenged for our customer base.
I am pleased with the origination growth we are seeing within our partnership lease channel and I'm encouraged by the low early default rates we.
We are seeing across all parts of our business.
As economic conditions strengthen flex shopper will be well poised to drive sustainable high quality growth across all of our distribution channels.
Let me turn the call back over to rich.
Thanks, John in closing our strategy has not changed.
We're continuing to pursue profitable growth with a disciplined view of credit risk.
Our plan was for the growth.
In our direct to consumer business to provide a bridge of growth leading to more and more future volume growth through our significant door front expansion with retail partners.
Unfortunately, yes.
<unk> mentioned the decline in response rates in approval rates has created a gap in our near term earnings, but it does not change the fundamental strategy.
We're going to continue to press forward with our retail storefront strategy, which most recently as highlighted by the announcement we made in October regarding our exclusive marketing partnership with Liberty tax.
As a reminder.
This new partnership establishes flex shopper as the exclusive financial services provider for more than 2000 storefront locations for Liberty tax in the United States.
We anticipate providing financial products to these consumers, who largely matched the demographic profile of the traditional flex sharper customer.
In addition to the store fronts. We also plan to use liberty's growing online presence, including their website and the liberty tax app to distribute <unk> shoppers products.
We are hopeful we will enjoy some benefits from the online liberty presence over this upcoming holiday shopping period, and we look forward to significantly benefiting from the expansion into the store fronts as we move into the 2023 tax season and beyond.
Our other significant retail partnership growth opportunity is based on aggressively expanding the door front service with an existing partner who is focused on tire sales and automotive services.
In addition to the retail partner expansion, we continue to be committed to the wholesale retail strategy John discussed earlier.
Increasing our retail partner or a retail margins through partnerships with manufacturers and distributors will enable us to improve the profitability of our online marketplace like shopper Dot com.
Irrespective of how the new leases or originated either through retail partnerships or directly to consumers.
It is difficult for us to know when the macroeconomic environment will improve.
Therefore, we're going to maintain a very disciplined approach to credit risk and we're going to reduce our costs to match. The current level of fundings. We are currently observing.
As the end of at the end of October we have made substantial reductions in expenses associated with employees and many of our outsourced technology partnerships.
We anticipate our base level of operating cost excluding marketing to be approximately 10% lower in 2023 and 2022.
Our view is that minimizing our cost structure.
Maintaining credit discipline and expanding our retail partnership network will enable us to push through the current macroeconomic environment and grow rapidly and profitably as the economy improves.
Thanks for your time.
We are well aware of the challenges associated with the current environment, but we are bullish regarding the long term prospects reflect shopper shareholders. We will now answer any questions you may have.
And at this time, we will be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And our first question comes from the line of Scott Buck with H C. Wainwright.
Proceed with your question.
Hi, good morning, everybody.
I'm curious a rich as these challenges kind of move through the fourth quarter here, how should we be thinking about demand just given the seasonal strength of the quarter. Historically I mean, it's Christmas canceled this year.
I I'm not canceling Christmas.
I'm not the grinch.
You are correct in that we normally see a seasonal seasonal.
Increase in our volume.
We continue to believe that will happen its difficult for us to predict what that will be we're going to continue to market.
On the online and try to drive people to our marketplace, we're not giving up on that.
But we are.
We're cautious.
Regarding the amount of volume that may be there and that's why we've gone ahead and made some adjustments to our cost structure, we're hopeful that a we get a volume boost.
From the holiday season, but certainly nothing we can be certain about.
Great.
That's good color.
I'm curious on the competitive landscape are you seeing any actions or behavior by competitors that you know maybe making some of the headaches that youre dealing with worse or is everybody you know really in the exact same boat here.
It's difficult for me to see what the competitors are doing I do like you I'm sure.
Read their press releases and.
They all seem to be.
Talking about many of the same things we are in that.
The credit quality there.
The profile of people, who are applying for credit appears to be on.
Unfavorable compare two times in the past.
So I think everyone is experiencing more declines and lower volume as a result of everyone exercising a reasonable amount of our credit discipline.
Okay, So youre, not seeing folks and kind of move down the credit chain enter into your yeah.
No we have not seen that we have not seen that in fact, they were going to speculate I think John mentioned in his commentary, we we speculate that.
Uh huh.
Lenders above us in the credit spectrum will tighten and if history repeats itself like it did.
And the in the past recession.
Then that should should increase our volume over time, because as people lose their liquidity they may be getting from.
Lenders above us in the credit spectrum, they would naturally drift down into our space.
Unfortunately, we have not seen that phenomenon, yet, but that is something that.
That we would generally anticipate.
But we are not.
Planning on that once again, we're getting our cost structure in place as if that will not happen.
Yeah, no that makes sense and then last one for me just on some of those cost reduction.
You know if this environment were to extent you know extend for a significant period of time do you guys have a little bit more room to cut.
Or do you feel like you're you've kind of gone through the muscle of at this point you're down to the bone.
I think we've made the.
Cuts, where we need to make them we were looking at some new initiatives.
Is any of the enterprise would you look at what Youre doing currently and what you may do in the future. We are not cutting back on what we're doing today, we're probably going to after the holiday season really making sure that we justify all of our marketing dollars in this environment, but that you were talking about.
We're not really talking about marketing cuts in this particular.
Expense reduction marketing, we'll adjust according to the market, okay, but as far as expense reductions go I think we've probably got what we need to.
Keep in mind, and I may not have been clear enough.
In my commentary.
We are very bullish about our retail expansion.
And while we're seeing.
Significantly lower approval rates in our direct to consumer marketing efforts, we're not seeing that same phenomenon in our retail partners.
So as we roll out these retail partners, we believe will move back into a growth mode relatively quickly.
In the coming year.
Yeah, no that makes sense and if I could squeeze one more in I just wanted to confirm it sounds like.
You guys will be up and running in all of the Liberty tax locations by the time tax season rolls around in January correct that is the game plan to a specific game plan with Liberty taxes.
Because of the holiday season, you mentioned, we're working very hard to Q&A.
To enable our marketing efforts on their digital channels right now we want to get that in place. Prior to this current holiday season at the same time, we have a separate team working with Liberty tax too.
To begin mobilizing to get into their store fronts as we move into the tax season, and as you know that with the Liberty tax.
Profile that tax season starts pretty early so we have a team mobilized right now too.
To begin rolling out into the to the Liberty tax stores system.
Beginning in January .
Okay perfect I appreciate the time guys. Thank you.
Sure.
And it looks like we have reached the end of the question and answer session. I will now turn the call back over to rich for closing remarks.
Thank you very much for joining us today, and we will talk to you guys next quarter.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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