Q2 2023 Katapult Holdings Inc Earnings Call

August 9, 2023

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Ladies and gentlemen, good morning, and welcome to the Caterpillar Holdings second quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference.

Please press star and zero on the telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Jennifer <unk> head of Investor Relations at catapult holiday.

Go ahead.

Welcome to catapult second quarter 2023 conference call on the call with me today are Orlando's diet, Chief Executive Officer, Nancy Walsh, Chief Financial Officer, and Derek Madeleine Chief operating officer.

For your reference we have posted materials for today's call on the Investor Relations section of the catapult website, which can be found at IR dot catapult holding dotcom.

I would like to remind everyone. This call will contain forward looking statements based on our current assumptions expectations and beliefs regarding our future financial performance and results, which are all subject to significant risks and uncertainties.

These forward looking statements should be considered in conjunction with cautionary statements contained in the earnings release and on Form 10-Q for the quarter ended June 30th 2023, as well as the subsequent periodic and current reports the company files Yeah P C.

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.

The information contained in this call is accurate only as of the date discussed.

Except as required by law the company undertakes 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 the company will provide certain financial information may constitute non-GAAP financial measures under SEC rule. These non-GAAP financial measures should not be considered replacements for and should be read together with our GAAP results.

A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is included with today's earnings release and is available on the Investor Relations section of the company's website with that I will turn the call over to Orlando.

Thank you Jennifer Welcome example.

We're happy to Javier to lead our Investor Relations program.

Now you are looking forward to getting to know our shareholders.

Thanks also to everyone joining us today, we're excited to share our progress and hear your feedback so I'll jump right in.

During the second quarter, our team worked hard and continue to lay the foundation for profitable growth.

This focus coupled with ongoing demand for lease to own products for underserved non prime consumers, who are often left behind by traditional financing options led to another quarter of strong financial and operating results.

In short we had another good quarter.

Year over year gross originations were up 18% to $54 7 million and.

Revenue grew two 9% to 54.9 dollars.

It's worth noting that gross originations have grown year over year for three consecutive quarters.

For our team's hard work it is allowing us to deliver these strong results.

With the strength of our topline results and lower fixed cash operating expenses of $9 6 million, our adjusted EBITDA improved to a loss of $280000.

Thank you I've mentioned before more than 30% of American consumers do not have access to traditional financing option.

Mark I believe approximately 37% of the adult U S population would not be able to cover a $400 emergency expense that assistant and.

And based on recent reports we believe this number will continue to grow.

With these dynamics chemical continues to have a compelling opportunities but are innovative.

<unk> platform to work produced consumed.

Our mission here at catapult.

This underserved communities gain access to the durable goods they need when they need them.

We will continuously helping our merchant partners.

<unk> to this growing base of engaged loyal customers.

It's a win win for both of our key stakeholders.

Alright, thanks for your seem to doing the right thing for all of our stakeholders is not only lateral and improving financial trajectory.

Also allows us to sustain industry, leading net promoter scores from our customers.

As of the end of the second quarter, our net promoter score was a strong six people.

Before I get to the update on our progress against our strategic pillars, I want to reiterate our growth strategy.

We've got two banks with goal to grow our merchant base. Thank you for all of our customer base.

And to do both.

Notably and simultaneously.

Let me explain how we're evolving our approach to achieve these goals.

We have been primarily focused on building our merchant bank, who we are.

We're also well positioned to expand our customer base.

For example, we are growing consumer engagement with our mobile App featuring catapult pack, providing what we believe are undeniable benefits to our customers and enhancing and deploying our technology capabilities across the board.

This is creating more avenues for growth outside of just dressed and integrations with merchants.

On one side, we are growing our business by being a unique channel solution for our merchant partners that helps expand our business.

This in turn has allowed us to expand the categories of durable goods that consumers can shop for now.

Now use catapult leased products.

Not for just about any durable goods you can imagine.

On the other side of our business, we're driving demand by building consumer awareness consideration and engagement, our expanded mobile capabilities and features and targeted marketing efforts.

We feel confident that we are creating a flywheel that unlocks.

Greater value for our merchant partners and enhanced experience for our loyal customers and that this will be the engine that powers our ability to achieve these three strategic pillars.

So now let me walk you through the progress we've made on each seller during the second quarter.

Our first pillar is all about our merchant.

Quite simply we need to deepen our existing merchant relationships and entering into new lines look marches and offer even more products consumers want.

So given this we are executing in three key areas.

Expanding direct integration merchant relationships.

Adding new markets, our direct integration pipeline.

Leveraging catapult pay to include more merchant.

Let's talk about our relationships with merchants that are already directly integrated with catapult first.

At a high level, we are looking for more data driven ways to drive business farmers.

Some of the opportunities. We are exploring include optimizing a offer Canadians and highlighting the lowest cost option to our consumers.

As we continue to build an even better understanding of what consumers are interested in we believe we are able to leverage special events targeted advertising and new promotional strategies to drive volume.

Although we are testing and learning with these opportunities we are seeing a gain early traction with our largest merchant.

Sure.

Take rates conversion customer flow and close rates remain healthy.

And recently wafer has begun to streamline their lending process and partners and catapult has emerged as the preferred partner for this important market.

We believe that this ongoing strong performance demonstrates the value we can bring remarks.

We're also working to add new margin charge offs integration pipeline with direct integrations, we have shifted our go to market efforts to larger enterprise merchants they have a.

Robust installed base of customers, where we can keep our customer acquisition cost low.

In addition, we want to partner with large retailers that will help catapult diversify products consumers to shop for using our unique <unk> model.

We believe over time, a more diverse offering.

Well, we got a driver of consumer engagement turning on our platform is that true shopping destination.

During the second quarter, we launched in signed contracts for.

Our new direct integrations with merchant spanning a variety of retail categories, including our newest expert.

Adding omnichannel mattress company.

The integration with cash flow will be both online and in store integration.

It's important to note that while we certainly expect direct integrations to remain an important driver for us.

Our only passed profitably scaling our business.

We are also moving to diversify our revenue stream with other channel driving let's start with a quick update on our newer growth drivers catapult.

As a reminder, catapult pays a feature in our App.

Virtual one time card that consumers can use for shopping online stores in the U S.

Each time, a customer uses catapult K, we create a unique card number that can be used a store's checkout.

We believe our chemical pace, each will become a powerful tool for both merchants and consumers.

For merchant and helps extend their customer base with new cohorts of engaged and loyal shoppers, who previously did not have the purchasing power to shop with us.

This translates into incremental sales and lower customer acquisition costs for a merchant.

For consumers.

Sam the fragrance easily shop for durable goods with a variety of key retailers, putting in purchasing power for the items they need within reach fair and transparent terms.

We believe both the merchant and the customers will benefit from this easy to use technology.

So far we have a growing list of merchants mechanical pay including home depot Amazon Bestbuy.

Ias five Ht.

HP Ikea and law.

We are pleased with the momentum we've been able to bill for catapult.

Which was launched just last year.

We're also exploring opportunities to leverage our data proprietary technology in industry.

A new ways to drive growth and address the emerging needs of our merchant.

Over the long term, we expect our offerings to include a diverse set of products that can address specific merchant need meet customers wherever they are shopping and drive growth for caterpillar.

The second pillar is focused on consumers, bringing new consumers to our network and broadening our relationships with those are already no chemical.

Let's start with our efforts in marketing and consumer engagement.

We are taking an increasingly data driven approach to both and are laying the foundation for new and more targeted marketing programs.

Average data science.

For example, we are adopting a new marketing platform that we believe will enhance our customer targeting efforts, allowing us to have more seamless and dynamic conversation with customers across email SMS and in App.

Push notification.

We believe we will be able to do a better job of putting the right content in front of the right customer at the right.

Excellent.

Platform will allow us to be more responsive to consumer behavior and quickly take action based on how customers are engaging with catapult.

We're currently launching phase one of this program email, but over the next 12 months, we expect to expand to a full suite of communications, so that will allow us to take our.

Our conversation with consumers to the next level.

We believe these tools will allow us to better address the full spectrum of lifecycle marketing opportunities from building awareness and consideration to purchase and repeat purchase.

These strategic marketing investments will.

Allow us to stimulate consumer demand with more targeted effort.

Second use our interactions with consumers to inform our customer segmentation data, which will allow us to create a better platform experience and drive customer engagement.

And finally leverage our engagement data helped drive home the value proposition we offer our marriage.

These efforts will encourage those current direct merchant still engaged in joint marketing campaign after those marches on.

On direct integration to see the value of a partnership with us.

Next let's talk about how we are driving customer repeat rates and fee rate is defined as a percentage of origination.

Lifting cost customers in any given quarter.

With our mobile App featuring catapult pay we've opened the door for our customers' access to products from high quality merchants in a simple and easy way.

This quarter, we continued to see strong repeat customer rate in fact, approximately 51% of our customers are repeat customers.

Repeat usage is a differentiator for catapult.

And by our focus on identifying consumer needs and driving high customer satisfaction.

We believe our AI powered technology, which allows us to quickly determine what goods are reasonable as a key ingredient in our customer experience and driver of repeat purchase.

If you just think about Amazon and home depot.

A lot of goods that we can't meet.

Because of our technology customers are able to determine upfront leesville and what is not.

In addition, being transparent with consumers about pricing and all in costs. This critical part of our value proposition. These characteristic coupled with the fact that we don't charge any hidden fees.

Have quickly been able to add more durable goods categories by bringing on larger retailers and creates a really great customer experience.

We will continue to look at opportunities to enhance our offering for consumers I believe that in doing so we can drive lifetime value of our loyal and engaged customers even higher over time.

Finally, our third pillar is really the foundation of which our business.

Our innovative technology.

One of our core strength is how adaptable and flexible our technology at the <unk>.

He is of use and workflow simplicity allows us to quickly address key merchant and consumer needs.

User experiences, which we believe are best in class to the speed at which we can deliver underwriting decisions. So our integration flows that allow us to launch more quickly with merchant, we believe our technology sets us apart.

During the second quarter, we continued to see the benefits from the launch of catapult PE and our leading edge AI capabilities allowed us to continue to add large retailers who are at both of these are a testament to the strength of our technology team Eric catapult.

Our tech strength is also accelerating maybe testing capabilities.

It will allow us along with updates to our App and website experience that we believe resonate even more deeply with our consumers more quickly for.

For example, we are using.

A b testing to test and learn the risk based pricing model.

In addition, we are leveraging our agile technology platform to support our new targeted marketing programs and other b to C.

We've made a lot of progress during the first half of the year and we remain focused on delivering value to all our stakeholders now I'll turn the call over to <unk>. So she can provide a review of our financial performance during the second quarter 2023 Nancy.

Thank you Orlando I'm excited to talk to you today about our strong second quarter results, which exceeded our outlook and to provide you with an update on the third quarter.

As Orlando has outlined.

Our operating priorities are centered around executing against our three pillars, which we believe will drive revenue growth and sustained profitability.

Let me provide you with some of the financial highlights for the second quarter of 2023.

Gross originations increased 18% year over year to $54 $7 million.

Increased originations were driven by strong performance through our direct merchants and mobile app channels as well as the continued expansion of merchant on our mobile app marketplace featuring catapult.

<unk> portfolio of direct merchants provides a funnel of new customers to drive gross origination at minimal customer acquisition cost.

As a reminder, gross origination trends are a leading indicator of future revenue stream.

A percentage of revenue was realized in the quarter in which the gross origination occurs and increases cumulatively over the next four quarters.

During the quarter approximately 51% of our origination came from existing customers.

This is up from 47% in Q1 and demonstrates continued strong engagement through our mobile app.

We are also seeing that customers, who engage with our catapult pay feature tend to be higher quality customers.

Hey, repeat purchase faster Ken to cross shop across merchants and categories more frequently and ultimately we expect them to have a higher lifetime value.

While we are still in early days since catapult <unk> was just launched late last year. We are very excited about its potential with both consumers and merchants.

Revenue increased two 9% year over year to $54 6 million and reflects the trends driving gross originations that I just mentioned as well as the strong volume performance, we saw in the first quarter.

Write offs as a percentage of lease revenue increased sequentially to nine 2% from eight 4% in Q1 2023.

<unk> increase was due to seasonal patterns and trends.

As a reminder, in 2022, we saw lower write offs and impairment charges related to our 2021 gross origination due to COVID-19 and other stimulus related prepayment patterns that year.

With this tailwind Q2, 2022 write offs as a percentage of lease revenue was six 4%.

Our long term target for write offs as a percentage of revenue is it 10% and our result, this quarter remain comfortably within this range.

We lowered our overall operating expenses by 13, 3% compared with Q1, 2023, and 16, 5% year over year.

These reductions were driven by the operating leverage benefits, we are achieving as a result of the expense reduction initiatives, we put in place in late 2022.

Excluding underwriting fees and servicing costs, which are variable and depreciation and noncash stock based compensation expense, our fixed cash operating expenses were $9 6 million.

Down 24, 6% compared to last year.

Based on our top line outperformance and the structural and sustainable benefits. We are realizing from our focus on operating efficiencies, we were able to improve our adjusted EBITDA performance substantially.

For the second quarter, we recorded an adjusted EBITDA loss of $280000, which was a $5 million improvement compared with the $5 $3 million loss, we reported in the second quarter of last year.

As of June 32023, we had cash and cash equivalents of $38 $2 million.

And we feel comfortable that our cash position and our credit facility provide us with the resources, we need to support our growth strategy.

The company continues to navigate an evolving macro environment, while there are a tailwind such as better inflation data and a reduced likelihood of a recession in the U S interest rates remain elevated lending standards are tight and the potential resumption of student loan repayment requirement may impact our core consumer's ability to take on new leases.

This mixed bag of economic indicators has led to continued economic uncertainty.

That said lease to own solution have historically benefited from periods of shrinking prime credit availability.

Based on this macro outlook in our operating plan for Q3 2023, we expect to deliver.

14% to 16% year over year increase in gross originations, which should be the fourth consecutive quarter of year over year growth.

This outlook is driven by our expectation that macro economic conditions in our collections trajectory remain consistent with the first half of the year and we see a positive impact from the new marketing initiatives, we discussed today.

We also expect revenue to grow 5% to 7% year over year compared with the second quarter of 2022.

Lastly, we expect our adjusted EBITDA performance to improve meaningfully compared with the third quarter of last year, reflecting our revenue growth expectation and further reduction of our fixed cash operating expenses.

We expect fixed cash opex to be down approximately 25% year over year.

In summary, we delivered strong gross origination revenue growth and improved profitability in the second quarter and the first half of the year, we have a healthy balance sheet that provides us with the financial room, we need to fund our growing pipeline of originations and to invest in our growth opportunities while enhancing our adjusted EBITDA.

And we remain focused on continuing to execute our strategic initiatives to drive growth and profitability.

I'd now like to turn the call over to the operator to open the line for Q&A.

Operator.

Thank you.

Ladies and gentlemen, we will now be conducting a question and answer session.

I would like to ask a question. Please press star and 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.

For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.

Ladies and gentlemen, we will wait for a moment, while we poll for questions.

Our first question comes from the line of Josh <unk> with Cantor Fitzgerald. Please go ahead.

Yes, hi, good morning, Thanks for taking my question today, So first of all I'd like to talk about wait there.

So in the quarter wait there representing 56% of gross originations, which was the highest percentage since <unk> 22, now as you expand catapult pay do you expect further diversification away from weight there as we head into 2024.

Hi, Josh its Orlando, yes.

We do the wafer or had a good quarter good half of the year quite frankly, where they had their way day.

And we've improved the partnership with them.

We're driving more repeat business back to them.

On our App catapult pay as well.

So we're real pleased that they continue to be a good part of our business, but yes, we believe that catapult pay and some of the other.

So the retailers that we added will start diversifying the portfolio a bit more.

Great. Thanks, Orlando appreciate that and then.

You guys were just talking about how your EBITDA guide implies further reduction in cash Opex I was wondering if you could elaborate a little more on the leverage in this business and your ability to maintain the lower opex levels.

In the future. Thanks.

Hi, This is Nancy thanks for the question Josh.

It really comes down to optimizing our efficiencies and productivity. So I don't think of it as just cutting cost and then at some point in the future we're going to have to build them back up again.

As you remember 2022 was an investment year that we've seen tremendous return on those investments that we made in terms of our app and catapult.

This year, we've continued to focus on optimizing the expenses, which will be sustainable going forward.

Got it thank you very much.

Thank you.

Our next question comes from the line of Vinson, Ken Fenech.

Stevens. Please go ahead.

Questions.

First question is sort of the industry competitive landscape I think it's impressive that.

You've grown this quarter and they are calling for growth in the third quarter.

When the other lease stone player.

Players in the industry are still shrinking.

Year over year.

Wondering if you are able to compare and contrast sort of what's driving catapult <unk> growth.

Double digit year over year growth versus maybe what we're seeing in industry that'd be helpful. Thank you.

Thanks for the question.

Nice to hear from you again.

Yes.

When we look at our business versus our competitors. It really is about the efficiency of our E Commerce and I think that the merchant.

The merchants on e-commerce.

For some of the store traffic.

All right.

Represented that store traffic was down across the board.

Then if you add to that working better with our merchants wafer for example, streamlined the number of players they have in the waterfall flow.

We also continue to work with them to drive improved business like I, just mentioned with Josh.

And then <unk>.

<unk>, obviously and adding some directly added Casper, which was a competitive win.

And the retailers that we're talking to like the fact that the ease of use the transparency.

The way, we treat our customers, but it matches their values and that's how we win and that's how we won kasper.

And then if you look at catapult.

We've got you can get about any durable goods and you can imagine so we're I think in the early days on that one with getting our current customers to go back.

Sure.

At multiple retailers, including Amazon and they can find stuff that maybe we didn't have a merchant before so we're pretty excited about that and I think the next step is to really start growing our other.

Other partnerships, where we can drive more customers in.

Just from a merchant perspective, and maybe a related industry, where we can do that.

Okay. Thank you.

And then I guess as part of <unk>.

You see a lot of waterfall data are you seeing.

I guess, maybe not competitors, but like.

Those who provide credit maybe that's it.

The higher levels tightening a bit I'm, just sort of wondering if that if there might be any volume opportunities from that.

Yes.

I actually mentioned that I think after our first quarter call that we started to see tightening back in October and because we are pretty much 95% waterfall.

We can see that almost directly when it when it starts to happen.

And it seems like it's leveled out it doesn't seem to be going deeper.

I think the tightening has happened.

Just taking advantage of that is helping obviously drive our growth.

Because we're seeing some better customers.

But I don't see a tightening much more.

Okay, Great and last one for me.

With the growth you're generating over $50 million <unk> and growing from here.

Just kind of looking at your balance sheet looking.

Under $40 million of cash.

I'm thinking about kind of your balance sheet position anything that you need to do there to kind of fund your fund your growth.

Yeah.

We are well positioned between the cash that we have on the balance sheet as well as the revolving letter.

Revolving credit facility that we have to sustain our growth going forward, we have options to accordion that facility and.

We just very comfortable with the liquidity position and that that can continue to foster the growth that we have.

Okay Thats great perfect. Thanks very much.

Thank you.

Okay.

Thank you Donna.

There are no further questions I would now hand, the conference over to Orlando for his closing comments.

Thank you.

So much for following our progress we're very excited not only by our results and the opportunities, but also by the positive impact that our business success can create for people in United States.

Any of us can't imagine not having access to credit to pay for a durable goods that most of US take for granted we're proud of the work the change this landscape.

Grateful that you as our shareholders are all just starting with US I look forward to updating you in the next quarter.

Our continued progress thank you very much.

Thank you the conference of Catapult Holdings has now concluded. Thank you for your participation you may now disconnect your lines.

Okay.

[music].

Ladies and gentlemen, good morning, and welcome to the capital Holdings second quarter 2023 earnings 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.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Jennifer <unk> head of Investor Relations at Catapult Holdings. Please go ahead.

For your reference we have posted materials for today's call in the Investor Relations section of the catapult website, which can be found at IR that catapult holding dot com.

I would like to remind everyone that this call will contain forward looking statements based on our current assumptions expectations and beliefs regarding our future financial performance and results, which are all subject to significant risks and uncertainties.

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.

The information contained in this call is accurate only as of the date discussed.

As required by law the company undertakes 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 the company will provide certain financial information that constitute non-GAAP financial measures under SEC rules.

These non-GAAP financial measures should not be considered replacements for and should be read together with our GAAP results a.

A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is included with today's earnings release and is available on the Investor Relations section of the Companys website with that I will turn the call over to Orlando.

Thank you Jennifer Welcome example, we're happy to have a year to lead our Investor Relations program and I know Youre looking forward to getting to know our shareholders.

Also to everyone joining us today, we're excited to share our progress and.

And hear your feedback so I'll jump right in.

During the second quarter, our team worked hard we continue to lay the foundation for profitable growth.

Coupled with ongoing demand for lease to own product for underserved non prime consumers are often left behind by traditional financing options led to another quarter of strong financial and operating results.

In short we had another good quarter.

Year over year gross originations were up 18% to $54 $7 million.

And revenue grew two 9% to $54 $6 million.

As noted in the gross originations have grown year over year for three consecutive quarters and we are.

Grateful for our team's hard work, but it's allowing us to deliver these strong results.

With the strength of our top line results and lower fixed cash operating expenses of $9 6 million, our adjusted EBITDA improved to a loss of $280000.

Thanks, Rod mentioned before more than 30% of American consumers do not have access to traditional financing options.

Mark I believe approximately 37% of the adult U S population would not be able to cover a $400 emergency expense without assistance and.

Based on recent reports we believe this number will continue to grow.

With these dynamics chemical continues to have a compelling opportunities, but our innovative Mr owned platform to work produced consumed our mission here at catapult to help this underserved community to gain access to the durable goods they need when they need them, while simultaneously, helping our merchant partners.

To extend their reach to this growing base of engaged and loyal customers.

It's a win win for both of our key stakeholders.

Our dedication to doing the right thing for all of our stakeholders is not only led to an improving financial trajectory and also allows us to sustain industry, leading net promoter scores from our customers.

As of the end of the second quarter, our net promoter score was a strong six people.

Before I get to the update on our progress against our strategic pillars, I want to reiterate our growth strategy.

Two basic goal to grow our merchant base and to grow our customer base.

And to do both.

Profitably and simultaneously.

Let me explain how we're evolving our approach to achieve these goals.

To date, we have been primarily focused on building our merchant base.

We are also well positioned to expand our customer base for.

This is creating more avenues for growth outside of just direct integrations with merchants.

On one side, we are growing our business by being a unique channel solution for our merchant partners that helps expand their businesses.

This in turn has allowed us to expand the categories of durable goods that consumers can shop floor. They can now use catapult lease to own product to shop for just about any durable goods you can imagine.

On the other side of our business, we're driving demand by building consumer awareness consideration and engagement through our expanded mobile capabilities and features and targeted marketing efforts.

We feel confident that we are creating a flywheel that unlocks greater.

Greater value for our merchant partners.

Enhanced experience for our loyal customers and that this will be the engine that powers our ability to achieve these three strategic pillars.

So now let me walk you through the progress we've made on each pillar during the second quarter.

Our first pillar is all about our merchant.

Quite simply we need to deepen our existing merchant relationships and entering into new ones with merchants and offer even more products consumers want.

To do this we are executing in three key areas.

Expanding direct integration merchant relationships.

Adding new margin to our direct integration pipeline.

Leveraging catapult pay to include more merchant.

Let's talk about expanding our relationships with merchants that are already directly integrated with catapult first.

At a high level, we are looking for more data driven ways to drive business farmers.

Some of the opportunities. We are exploring include optimizing our offer pages and highlighting the lowest cost payout options to our consumers.

Although we are testing and learning with these opportunities we are seeing in gaining early traction with our largest merchant wins there.

Take rates conversion customer flow and close rates remain healthy.

And recently wafer has begun to streamline their lending process and partners and Caterpillar has emerged as the preferred partner for this important merchant.

We believe that this ongoing strong performance with wafer demonstrates the value that we can bring remarks.

We're also working to add new merchants to our direct integration pipeline with direct integrations, we have shifted our go to market efforts to larger enterprise merchant to have a robust installed base of customers, where we can keep our customer acquisition cost low.

In addition, we want to partner with large retailers that will help catapult diversify products consumers to shop for using our unique lease to own model.

We believe over time, a more diverse offering.

We had a driver of consumer engagement, turning our platform into a true shopping destination.

During the second quarter, we launched in signed contracts.

Our new direct integrations with merchant spanning a variety of retail categories, including our newest asper, a leading omnichannel mattress company.

The integration with cash will be both online and in store integration.

It's important to note that while we certainly expect direct integrations to remain an important driver for us.

Not our only path of profitably scaling our business.

We are also moving to diversify our revenue stream with other channel driving let's start with a quick update on our newer growth drivers catapult.

As a reminder, catapult pay as a feature in our App.

Virtual one time card that consumers can use for shopping and online stores in the U S.

Each time, a customer uses catapult, we create a unique card number that can be used with the store's checkout.

We believe our chemical pace, if you will become a powerful tool for both merchants and consumers.

For merchant and helps extend their customer base with our new cohorts are engaged and loyal shoppers, who previously did not have the purchasing power this shop with them.

This translates into incremental sales and lower customer acquisition cost for a merchant.

For consumers.

Then the freedom to easily shop for durable goods with a variety of key retailers, putting in purchasing power for the items they need within reach a fair and transparent terms.

We believe both the merchant and the customers will benefit from this easy to use technology.

So far we have a growing list of merchants mechanical pay including home depot, Amazon Wayfarer, Bestbuy, Napster, HP Ikea and law.

We are pleased with the momentum we've been able to build for catapult, which was launched just last year.

We're also exploring opportunities to leverage our data proprietary technology and industry, Knowhow and new ways to drive growth and address the emerging needs of our merchant.

Over the long term, we expect our offerings to include a diverse set of products that can address specific merchant needs meet customers wherever they are shopping and drive growth for accountable.

The second pillar is focused on consumers, bringing new consumers to our network and broadening our relationships with those are already know catapult.

Let's start with our efforts in marketing and consumer engagement.

We are taking an increasingly data driven approach to both and are laying the foundation for new and more targeted marketing programs that leverage data science.

We believe we will be able to do a better job of putting the right content in front of the right customer at the right time.

This platform will allow us to be more responsive to consumer behavior and quickly take action based on how customers are engaging with catapult <unk>.

We are currently launching phase one of this program email, but over the next 12 months, we expect to expand to a full suite of communications.

It will allow us to take.

Our conversation with consumers to the next level.

We believe these tools will allow us to better address the full spectrum of lifecycle marketing opportunity from building awareness to consideration to purchase and repeat purchase.

These strategic marketing investments will allow us to stimulate consumer demand with more targeted effort.

Second use our interactions with consumers to inform our customer segmentation data, which will allow us to create a better platform experience and drive customer engagement.

And finally leverage our engagement data helped drive home the value proposition we offer farmers.

These efforts will encourage those current direct merchant to engaged in joint marketing campaign after those marches on.

On direct integration to see the value of a partnership with us.

Next let's talk about how we are driving customer repeat rates repeat rate is defined as a percentage of origination.

Lifting cost customers in any given quarter.

With our mobile App featuring catapult pay we've opened the door for our customers to access the products they need from high quality merchants in a simple and easy way.

This quarter, we continued to see strong repeat customer rate in fact, approximately 51% of our customers are repeat customers.

Repeat usage is a differentiator for catapult and is powered by our focus on identifying consumer needs and driving high customer satisfaction.

We believe our AI powered technology, which allows us to quickly determine what goes through a reasonable as a key ingredient in our customer experience and driver of repeat purchases.

If you just think about Amazon and home depot, they offer a lot of goods that we can't meet.

Because of our technology customers are able to determine upfront what is leasable and what is not.

In addition to being transparent with consumers about pricing and all in costs. This critical part of our value proposition. These characteristic coupled with the fact that we don't charge any hidden fees.

Have quickly been able to add more durable goods categories by bringing on larger retailers and creates a really great customer experience.

We will continue to look at opportunities to enhance our offering for consumers I believe that in doing so we can drive lifetime value of our loyal and engaged customers even higher over time.

Finally, our third pillar is really the foundation of what's our business to our innovative technology.

One of our core strength is how adaptable and flexible our technology at the <unk>.

Ease of use and workflow simplicity allows us to quickly address key merchant and consumer needs.

User experiences, which we believe are best in class.

So the speed at which we can deliver underwriting decisions through our integration flows that allow us to launch more quickly with merchant, we believe our technology sets us apart.

During the second quarter, we continued to see the benefits from the launch of catapult PE and our leading edge AI capabilities allowed us to continue to add large retailers through our app. Both of these are a testament to the strength of our technology team ear catapult.

Our tech strength is also accelerating our AB testing capabilities. This will allow us to launch updates to our App and website experience that we believe resonate even more deeply with our consumers more quickly for.

For example, we are using.

AAV testing to test and learn the risk based pricing model.

In addition, we are leveraging our agile technology platform to support our new targeted marketing programs and other b to C F.

We've made a lot of progress during the first half of the year and we remain focused on delivering value to all our stakeholders now I'll turn the call over to Nancy. So she can provide a review of our financial performance during the second quarter of 2023 Nancy.

Thank you Orlando I'm excited to talk to you today about our strong second quarter results, which exceeded our outlook and to provide you with an update on the third quarter.

As Orlando has outlined.

Our operating priorities are centered around executing against our three pillars, which we believe will drive revenue growth and sustained profitability.

Let me provide you with some of the financial highlights for the second quarter of 2023.

Gross originations increased 18% year over year to $54 $7 million.

Increased originations were driven by strong performance through our direct merchant and mobile app channels as well as the continued expansion of merchants on our mobile app marketplace featuring catapult.

Catapult portfolio of direct merchants provides our funnel of new customers to drive gross origination at minimal customer acquisition cost.

As a reminder, gross origination trends are a leading indicator of future revenue stream.

A percentage of revenue is realized in the quarter in which the gross origination occurs and increases cumulatively over the next four quarters.

During the quarter approximately 51% of our originations came from existing customers.

This is up from 47% in Q1 and demonstrates continued strong engagement through our mobile app.

We are also seeing that customers, who engage with our catapult pay feature tend to be higher quality customers.

A repeat purchase faster tend to cross shop across merchants and categories more frequently and ultimately we expect them to have a higher lifetime value.

While we are still in early days and catapult pay was just launched late last year.

Excited about its potential with both consumers and merchants.

Write offs as a percentage of lease revenue increased sequentially to nine 2% from eight 4% in Q1 2023. This sequential increase was due to seasonal patterns and trends as a reminder, in 2022, we saw lower write offs and impairment charges related to our 2021 gross originations due to COVID-19.

And other stimulus related repayment patterns that year.

With this tailwind in Q2 2022 write offs as a percentage of lease revenue was six 4%.

Our long term target for write offs as a percentage of revenue is it 10% and our result, this quarter remain comfortably within this range.

We lowered our overall operating expenses by 13, 3% compared with Q1, 2023, and 16, 5% year over year.

These reductions were driven by the operating leverage benefits, we are achieving as a result of the expense reduction initiatives, we put in place in late 2022.

Excluding underwriting fees and servicing costs, which are variable and depreciation and noncash stock based compensation expense, our fixed cash operating expenses were $9 6 million down 24, 6% compared to last year.

For the second quarter, we recorded an adjusted EBITDA loss of $280000, which was a $5 million improvement compared with the $5 $3 million loss, we reported in the second quarter of last year.

As of June 32023, we had cash and cash equivalents of $38 $2 million.

And we felt comfortable that our cash position and our credit facility provide us with the resources, we need to support our growth strategy.

This mixed bag of economic indicators has led to continued economic uncertainty.

That said lease to own solution have historically benefited from periods of shrinking prime credit availability.

Based on this macro outlook in our operating plan for Q3, 2023, and we expect to deliver.

14% to 16% year over year increase in gross originations, which should be the fourth consecutive quarter of year over year growth Mister.

This outlook is driven by our expectation that macroeconomic conditions in our collections trajectory remained consistent with the first half of the year and we see a positive impact from the new marketing initiatives, we discussed today.

We also expect revenue to grow 5% to 7% year over year compared with the second quarter of 2022.

We expect fixed cash opex to be down approximately 25% year over year.

In summary, we delivered strong gross origination revenue growth and improved profitability in the second quarter and the first half of the year.

We have a healthy balance sheet that provides us with the financial room, we need to fund our growing pipeline of originations and to invest in our growth opportunities while enhancing our adjusted EBITDA.

And we remain focused on continuing to execute our strategic initiatives to drive growth and profitability.

I'd now like to turn the call over to the operator to open the line for Q&A.

Operator.

Thank you.

Ladies and gentlemen, we will now be conducting a question and answer session.

I would like to ask a question. Please press star and 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.

For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.

Ladies and gentlemen, we will wait for a moment, while we poll for questions.

Our first question comes from the line of Josh <unk> with Cantor Fitzgerald. Please go ahead.

Yes, hi, good morning, Thanks for taking my question today. So first of all I'd like to talk about weight. There. So in the quarter wait there representing 56% of gross originations, which was the highest percentage since <unk> 22, now as you expand catapult pay do you expect further diversification away from weight there as well.

In the 2024.

Hi, Josh its Orlando, yes.

We do the wafer or had a good quarter good half of the year quite frankly, they had their way day.

And we've improved the partnership with them.

We're driving more <unk>.

Pete business back to them.

Honor catapult pay as well so we're real pleased.

They continue to be a good part of our business, but yes, we believe that catapult pay and some of the other.

So the retailers that we added will start diversifying the portfolio.

Great. Thanks, Arlinda I appreciate that and then.

In the future. Thanks.

Hi, This is Nancy thanks for the question Josh.

It really comes down to optimizing our efficiencies and productivity. So I don't think of it as just cutting cost and then at some point in the future we're going to have to build them back up again.

As you remember 2022 was an investment year that we've seen tremendous return on those investments that we made in terms of our app and catapult pay.

This year, we've continued to focus on optimizing the expenses, which will be sustainable going forward.

Got it thank you very much.

Thank you.

Our next question comes from the line of Vincent <unk> with.

Stevens. Please go ahead.

Questions.

First question is sort of the industry competitive landscape I think it's impressive that.

You've grown this quarter and are calling for growth in the third quarter.

The other lease stone players.

Players in the industry are still shrinking.

Year over year.

Wondering if you are able to compare and contrast sort of what's driving catapult <unk> growth.

Double digit year over year growth versus maybe what we're seeing in industry that'd be helpful. Thank you.

Thanks for the question.

Nice to hear from you again.

Yes.

When we look at our business versus our competitors. It really is about the efficiency of our E Commerce and I think that the merchant.

The merchants on e-commerce.

For some of the store traffic.

All right.

Represented that store traffic was down across the board.

Then if you add to that working better with our merchants wafer for example, streamline the number of players they have in their waterfall flow.

We also.

We need to work with them to drive improved business like I, just mentioned with Josh.

And then.

<unk>, obviously and adding some direct we added Casper, which was a competitive win.

And the retailers that we're talking to like the fact that the ease of use the transparency.

The way, we treat our customers, but it matches their values and that's how we win and that's how we won kasper.

And then if you look at catapult pay you know we've got you can get about any durable goods and you can imagine so we're I think in the early days on that one with getting our current customers to go back.

<unk>.

Other partnerships, where we can drive more customers in.

Just from a merchant perspective, and maybe a related industry, where we can do that.

Okay. Thank you.

And then I guess as part of <unk>.

You see a lot of waterfall data are you seeing.

I guess, maybe not competitors, but like.

Those who provide credit maybe.

The higher levels tightening a bit I'm, just sort of wondering if that if there might be any volume opportunities from that.

Yes.

I actually mentioned that I think after our first quarter call that we started to see tightening back in October and because we are pretty much 95% waterfall.

We can see that almost directly when it happens when it starts to happen.

And it seems like it's leveled out it doesn't seem to be going deeper.

I think the tightening has happened.

Taking advantage of that and that's helping obviously drive our growth.

We're seeing some better customers.

But I don't see a tightening much more.

Okay, Great and last one for me so.

So with the growth you're generating over 50 million <unk> and growing from here.

Just kind of looking at your balance sheet looking under $40 million of cash.

Thinking about kind of your balance sheet position anything that you need to do there to kind of fund your fund your growth.

Okay.

We are well positioned between the cash that we have on the balance sheet as well as the revolving let our revolving credit facility that we have to sustain our growth going forward.

Have options to accordion that facility and we.

We just very comfortable with the liquidity position and that that can continue to foster the growth that we have.

Okay Thats great perfect. Thanks very much.

Thank you.

Okay.

Thank you has there are no further questions I would now hand, the conference over to Orlando.

As far as closing comments.

Thank you.

So much for following our progress we're very excited not only by our results and the opportunities, but also by the positive impact that our business success can create for People's United States. Many of us can't imagine not having access to credit to pay for a durable goods that most of US take for granted we're proud of the work the change this landscape and are grateful that you.

You as our shareholders are on this journey with us and I look forward to updating you in the next quarter.

With our continued progress thank you very much.

Thank you the conference of Catapult Holdings has now concluded. Thank you for your participation you may now disconnect your lines.

Q2 2023 Katapult Holdings Inc Earnings Call

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