Q1 2023 FlexShopper Inc Earnings Call

Greetings and welcome to Flex Shopper first quarter financial results Conference call. At this time, all participants are in a listen only mode.

<unk> 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 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 'twenty to 'twenty three financial results Conference call with me today are Russ Heiser, our Chief Executive Officer, and John Davis, Our Chief operating Officer.

We issued our earnings release on Thursday of last week, and a corresponding investor relations presentation. This morning, and we will be referencing these during the call today well it can be found in 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 cautionary statements contained in our earnings release and the company's most recent periodic SEC reports, including our annual report and quarterly report 10-Q for the quarter ending March 31, 'twenty to 'twenty three.

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.

Or events or otherwise.

During today's discussion our financial our financial performance, we will provide certain financial information that contains non-GAAP financial measures under SEC rules.

These include measures such as 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.

Conciliation to GAAP measurements and certain additional information are also included in today's earnings release, which is available on the investors section.

Of our website. This call is being recorded and a webcast will be available for replay on our Investor Relations section of our website I will now turn the call over to our CEO Russ Heizer.

Carlos Good morning, I appreciate everyone dialing in this morning.

Today, I'll discuss a few highlights and some new initiatives before handing off to John Davis, our CFO . So he can share further insights on the operational metrics and then we will open the call to questions.

First quarter 40, 23 was softer than start with net revenue of over 30 million gross profit of $13 million and EBITDA of over $6 million.

A substantial adjustments to our underwriting and risk management have resulted in solid improvements to loss rates.

Actually we have seen a decline in early pay offs, which also increases the yield on the portfolio.

We expect that with no other substantive changes to the macro environment loss rates will continue and continue to improve over the next two quarters as we cycled through the historical portfolio that was originated at the height of last year's inflationary increases and before we had tightened underwriting to our current levels.

But what we hope are the most negative consequences for our customers of this inflationary environment behind US. We're now focused on positioning ourselves to take advantage of opportunities.

Additional upside should come from stronger credit profile is applying for lease to own is the more traditional providers of consumer credit continues to tighten their own underwriting. So far we have yet to see a meaningful improvement in the risk profiles of new applicants, however by making some adjustments to our pricing model, we hope to be a compelling source of liquidity for these types of customers going forward.

Yeah.

On top of the contract extension with our largest partner mentioned on the last call. Our enterprise sales team has been progressing with a few large retail partners and we are approaching the finish line.

As a result, we expect a meaningful impact on the amount of new customer originations on boarded through retailers in the second half of this year.

Furthermore, as many of our long time investors are aware the outside of a few select initiatives, we have yet to focus on small and medium businesses now the macro environment is showing some stabilization. We believe this is the time to launch a sales team focused on the segments that will complement our enterprise sales efforts as well as our flex shopper dot com marketplace.

On the lending front the revolution storefront platform will be on boarding its first new virtual virtual locations with Liberty tax franchisees. This quarter took almost six months longer than I expected to get to this point, we now have the necessary infrastructure enhancements and regulatory framework to begin rolling out new locations.

Well it takes a while to grow the portfolio size at each new location the magnitude of potential locations should provide lift as the rollout speed up.

Now I'll turn the call over to John discuss our operations.

Thanks, Russ I continue to be cautiously optimistic about the trends of the economy related to the typical what shopper customer.

With the rise of inflation observed last year, our typical customer experienced their own personal recession their take home pay reduced by increases in core expenses, such as food transportation and housing with.

The year over year inflation rate dropping for the 10th consecutive months and last week's government report.

Customers getting some stability in their monthly expenses, which leads to more predictable payment rates on their obligations with flex shopper.

Total funded originations increased 29% year over year gross profit dollars increased by approximately $4 $2 million year over year and our gross profit margin improved by approximately 12 100 basis points from Q1 last year.

Gross profit from loans increased by a net $3 $5 million and gross profits from leases increased by $800000 year over year.

Or at least channel our underwriting standards remain significantly tighter year over year with a 24% lower approval rate on submitted <unk> applications, and a 19% year over year reduction in lease origination dollars.

We are beginning to lap underwriting changes made last year in Q2 was a further lapping in Q3.

Also increases that we have observed an approval conversion and higher average order value to start to result in positive year over year lease origination growth as we move through the rest of 2023.

Also continuing rollouts of existing bricks and mortar partnerships should provide significant volume increases from current levels.

With a combination of a stabilizing inflationary environment.

And the results of our underwriting and collection strategies I'm pleased to see that are least bad debt percentage has improved.

Over 800 basis point improvement from Q4 2022.

Absent a relapse and unfavorable economic conditions I expect our least bad debt percentage to continues to be a tailwind to flex shopper profitability. This year.

Net leased net billing and fees were approximately $3 million lower year over year this quarter due to lower origination levels from our proactive credit tightening over the past few quarters.

Offsetting this was a $3 8 million lower depreciation and impairment of lease merchandise expense.

Depreciation as a percentage of gross lease building in fees for Q1 was 44, 8% versus 48, 4% in Q1 of last year were approximately a 360 basis point improvement.

This is in part due to the seasoning of our retail margin expansion efforts.

As leases mature with this additional retail margin included our lease depreciation cost decrease as a percentage of gross billings.

The net result of the bad debt moderation in retail margins seasoning was an $800 increase in lease gross profit year over year, even with the significant drop in approval rates year over year.

As we left credit tightening and rollout new storefront doors improved unit profitability should provide tailwind to overall results.

On our lending front, we originated $14 million in Q1 through a revolution finance platform.

As a reminder, we issue consumer loans with approximately 100 storefronts consisting of own physical locations and virtual locations within Liberty tax doors using state lending licenses.

These originations represented over one half of our total originations for Q1. It has immediately become an important part of our business.

We're happy with the credit quality of the loans were originating and the team is looking to expand both same store loan volumes through marketing initiatives as well as looking to expand into new virtual location system, the Liberty tax network.

As I mentioned earlier this channel provided approximately $3 $5 million and higher gross profit versus Q1 of 2022.

We are also operating the business more efficiently versus last year salary.

Salary and benefit expense and operating expenses were $283000 lower year over year, while growing revenue by 6%.

Also lease marketing expense was significantly lower year over year offset by higher loan origination costs from the indirect introduction Revolution volume.

Excluding depreciation and impairment of lease merchandise the operating expense ratio improved by 160 basis points year over year.

As we grow we will continue to be mindful of expense discipline and leverage our existing platform to achieve growth as efficiently as possible.

As a summary, we continued to develop a diverse revenue stream between their proprietary lease marketplace, a bricks and mortar lease and loan partnerships and a revolution loan platform, which will provide profitable growth for flex Alba.

I'm excited about the opportunities that we have in front of us I.

I also want to personally thank our team members and our partners who contribute so much to the results we're achieving.

With that let me turn the call back over to Russ Thanks, John .

It has demonstrated this quarter the team at flex shopper is well on its way to surpassing previous revenue and EBITDA benchmarks.

As John mentioned the team continues to.

To.

<unk> achieved significant results on a accelerated timeframe. We're pleased with all of what's taking place and that will take any questions you might have.

Thank you if he would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is it. The question. Kim you May Press Star two if he was ice cream of your question from the queue and for participants using speaker equipment may be necessary to pick up your hand.

Set before pressing the star. He is our first question is from Scott Buck with H C. Wainwright. Please proceed.

Hi, Good morning, guys. Thanks for taking my question.

Russ you mentioned, you're making some changes in the pricing model to attract some new customers did you give a little bit more color on what you guys are doing there.

Sure I think as we continue to see.

See new customers come in or potentially come in as a result of tightening up all of US I think there's probably a spot where they can fill in that necessarily isn't necessarily a 2.4 markup.

Okay.

Uh huh.

Sorry go ahead.

Oh, no I was just going to as you know that.

There's a lot of room between potentially where these customers are being denied for additional liquidity and a 2.4 marked up and we just want to.

Make sure we can bring those customers and be attractive to them.

No that makes sense.

And then on marketing it looks like you were down pretty meaningfully both sequentially and year over year are you guys seeing some improved efficiency in the way you market devotes or is that just.

My factor of seasonality, plus just a little bit of a internal tightening.

Yeah, Hi, this is John it there's a combination of the of the two really are we are certainly seeing more efficiency in our marketing or conversion rates on approved customers are a significant.

<unk> hire a lot of effort has been put into to improve that.

There's also certainly a seasonality factor in play Q1 is usually less.

Theres less demand because of tax returns and customers have more liquidity than certainly a during a holiday season.

And then I think third we're we're always mindful of what we spend on marketing with low approval rates you know the the marketing cost as a function of the cost too.

Bring an application in AR and the approval rate, but as we start to lap approval rate changes and actually expect to see higher approval rates going into Q.

Two and forward, we actually expect to spend more money because the unit.

Cost to acquire will be improving.

Okay. That's helpful. John and then last one for me.

The early prepayments or are we just talking that up to tax refunds in the quarter or is there something else going on.

Yeah.

The decline in prepayments, we think is really a function of.

Our customers, having less available liquidity, the disposable income and thus not paying off as frequently as they pay it off in the past. There's also been some changes into how.

Frequently we market the <unk>.

90 day same as cash on our online platform and that's also resulted in a decrease.

Got it right. So it was a decline, but I must've misheard. Thank you very much for the time guys I appreciate it.

Thanks.

You have reached the end of our question and answer session I would like to turn the conference back over to Ross for closing comments.

Thanks again for all of you that joined our call. This morning feel free to reach out with any additional questions you might have and we look forward to catching up with you for the <unk> 2023 presentation.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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