Q2 2023 FlexShopper Inc Earnings Call
Greetings and welcome to the Flex shopper, a second quarter 2023 financial results 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.
I'd now like to turn the conference over to your host Carlos Sanchez Investor Relations for Flex shopper. Thank you you may begin.
Thank you and good morning, everyone welcome to select shoppers second quarter 2023 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 Monday, 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 will be available for question and answers today following todays prepared remarks.
Before we begin I would like to remind everyone that this call will contain forward looking statements regarding future events and 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, including our 10-Q quarter ending.
At June 30th 2023.
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.
Obviously update or revise any of these statements.
During today's discussion of our financial performance, we will provide certain financial information that contains non-GAAP financial measures under SEC rules.
Include measures such as EBITDA net income adjusted net income and non-GAAP financial measures. These should be considered should not be considered replacements and should be read together with our GAAP results.
Reconciliation for these GAAP measurements and certain additional information.
Also included in yesterday's earnings release, which is available in the investors section of our website. This call is being recorded and a webcast will be available for replay on.
On our Investor section of our website I will now turn the call over to our CEO rush either.
Thanks Carlos.
Good morning, I appreciate everyone dialing in.
Before we dive into the results of the second quarter I'd like to share with listeners the primary initiatives that the company this year progress on achieving those goals.
The direct to consumer price through our flex shopper dot com marketplace. We've been focused on two initiatives improving asset level performance and growing originations on the first of these improving asset level performance. We have achieved the highest levels in the history of this company through a combination of both growing relationships with wholesalers to increase their retail mark.
On the products in our site.
And just staying disciplined on our underwriting cutoff to provide a cushion as our consumer segment continues to face significant economic headwinds.
Investors can expect to see these wholesale margins continue to grow as we onboard more distributor partners and this impact will be seen as further decreases in cost of lease revenues relative to your lease revenues.
Dishing as underwriting changes continue to mature as that expense as a percentage of gross lease revenues will decrease over the next several quarters.
The flip side of this disciplined underwriting is that our approval rate is substantially lower than it's been over the last several years.
Silver lining to this though is that we have noticed that only a small percentage of visitors to our sites and up even applying for at least product. As a result, we are in the process of adding additional checkout refinancing options to our site and monetize a larger percentage of the incoming traffic and expect this launch to occur in time to take advantage of the holiday season.
On this broader set of customers flex shopper will not only capture the margin on the product oversee origination fees from the other financing sources.
Our expectation is that this will provide the financial catalyst for much higher marketing spend on a year round basis, resulting in much higher lease originations through this channel and the higher marketing spend will be offset by the product margins on items facilitated with other financing options.
Shifting to our brick and mortar based retailer business, we continue to see significant growth on the store count of our enterprise partnerships.
Rollout timing never goes as quickly as we would like but the summer is seeing significant significant growth as one of our tenured retailer partners has grown substantially and one of our longer running pilot just moving into a full rollouts.
In addition, we are in late stage discussions with another large enterprise partner that has the potential to increase the originations on this portion of our business by 50%.
Of course, as we have mentioned many times previously the sales cycle for these large partners can be long and the rollout process can be equally as long.
Therefore over this summer we've added internal team to complement the external teams to focus on growing our exposure to smaller retailers.
Most cases, selling the smaller retailers the easy part supporting them with training and answering their questions as the heavier lift if.
We will continue to add to our internal team as we optimize the proper support levels for both our enterprise and smaller retailer initiatives.
The final piece to disguise the storefront lending business acquired in late 2022, we have been successful there on a few fronts in terms of stabilizing asset level performance are on our way to optimizing the product offerings for each state.
Now we need to grow both the originations within our current footprint expand our footprint by rolling out more locations.
And we're making some modifications to the leadership structure to accomplish that more quickly.
Given the operating leverage inherent in our store base business. Once we're able to gain significant traction on originations, we should start to see earnings from this business grown measurably well.
I'll now hand, the call to John to walk through our quarterly results.
Thanks, Ross to begin I wanted to review, our quarterly financial performance and comparisons to last year flex.
Flex shopper earned approximately $300000 in EBITDA compared to $6 $4 million in EBITDA in Q2 of 2022.
This town there are some one time items last year that increased last year's performance and should be taken into account when reviewing underlying performance of the business.
Starting with our lease to own business gross lease billings and fees were $32 $5 million in 2023.
She is $39 $6 million in 2020 two.
With net nice billing and fees of $22 $9 million versus $35 million last year for the core.
Q2, 2022 leased net leased number.
Approximately $6 $6 million in revenue from a bulk sale of past due lease receivables.
2023 we had approximately $1 $3 million in revenue from past due receivables sales from a forward flow arrangement.
Excluding these sales net lease revenue was approximately 9% year over year versus the 25% unadjusted number.
This accounted for most of the year over year EBITDA variance.
Lease origination volume was slightly higher versus Q1 of this year was $6 $5 million lower year over year in Q2, primarily due to tighter year over year credit standards.
As we have discussed in previous calls.
You had subsequent tightening ground's last year due to the increasing inflationary environment, which negatively impacted our customers.
This tightening continued into Q3 of last year. So we expect that the lapping of these changes will be fully realized next quarter.
We are also currently accelerating the rollout of antitrust enterprise partnership lease programs in Q3 of this year, which we expect will provide significant origination growth from current levels.
Additionally, we have launched new sales initiatives on both enterprise and smaller partnership.
<unk> programs, which we expect will continue to drive continued growth in the number of storefronts that use our leasing products over the balance of the year.
As we generate nice unit growth you will have tailwind from higher average lease sales, which were $668 in Q2 this year versus $579 in Q2 last year.
The results of our credit tightening have resulted in a significant reduction in our bad debt expense.
Provision for doubtful accounts expense dropped by $4 $9 million year over year, or 31% decrease versus Q2 of last year.
While the reduction in dollar expense is in part due to a lower revenue number was 31% drop in expense greatly exceeded the 18% drop the drop in gross lease revenue.
It's a 33% bad debt percentage this year versus 40% last year.
Payment performance has improved as a result of our credit tightening as well as a moderation in inflation increases.
Is resulting in a more profitable lease asset versus last year.
Also contributing to lease improving lease profitability is the continuing seasoning of retail product margins with the introduction of products sourced from manufacturers and distributors launched last year.
Depreciation and impairment of lease merchandise expense in Q2 of 2023 was $14 $5 million versus $18 2 million last year or 20% decrease versus last year.
Similar to bad debt expense lower revenue results in lower dollar expense, but the percentage drop was larger than the drop in revenue.
The realization of product margin over the term of our lease continues to season into our financials, which is resulting in lower expense levels on our lease revenue.
Excluding the impacts of the sales of past debt past due receivables net lease revenue consisted of gross consisting of gross billings less provision in depletion cost with.
$7.2 million in Q2 of this year versus $5 $7 million in Q2 of last year.
Even with lower gross lease revenues year over year, we actually made more net revenue this year with our lease product with the improvement in loss rates and product costs.
Asset quality has always been a top priority for us.
Now that we have moved our underlying profitability ratios to more favorable levels. Our focus as a leadership team is to grow originations through both our marketplace and partnership channels.
On our lending front, we originated $14 million in Q2 through our Revolution finance platform and zero point $1 million for a loan participation program.
This compares to $12 $9 million in to Q2 of last year.
Participation program with no originations through evolution, which we acquired in Q4 of last year.
As a reminder, we can we issue consumer loans and approximately 100 storefronts consisting of own physical locations and virtual locations within Liberty tax stores using state lending licenses.
We have pivoted our go forward lending scribe strategy towards a revolution platform. We are planning on further origination growth there through various investments in people I T.
A new generation of risk modeling and marketing strategies.
As is the case with our lease business, we're happy with the underlying asset performance of our loan business and are now focused on ROE with growing originations and revenue.
Overall operating expenses were $1 $3 million lower year over year for Q2.
Primarily driven by lower marketing costs.
Well, we have conservative underwriting standards in place we have been prudent in our marketing spending within our marketplace lease segment.
As we make progress on initiatives that will increase conversion rates of visitors to flex shopper dot com, we expect to increase marketing spend that will result in higher revenue.
At the improved revenue levels discussed earlier.
To summarize we have made a lot of progress on getting asset level returns to levels that we are happy with our focus in the second half of 2023 is to originate more of these profitable customers in general generate topline growth.
Let me turn the call back over to Russ.
Thanks, John .
The team at Flex effort continues to focus on improvements to our business in order to position ourselves for long term earnings growth.
I will take any questions you might have.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from the line of Scott Buck with H C. Wainwright. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my questions.
Russ on the smaller retail initiative.
I guess, what qualifies as a small retailer and how large is this.
The market in terms of opportunity.
Good morning, Scott, So we redefined the the smaller retailer.
It is different from our enterprise customers or enterprise customers typically have 250 or more locations. The smaller retailer typically ends up being 15.
Individual locations or less.
And in terms of the size of that market.
Thank you.
The Sky's the limit as I mentioned, though it's really requires a lot more handholding theres not as much our internal resources that these retailers to handle.
Handled training et cetera. So.
What we've implemented is a bit of a.
Farming methodology with some of these.
Internal salespeople, where they are.
Signed to a fairly large number of locations, but the thought process is how can they increase the number of lease originations within that footprint that they're assigned and that's by visiting the stores classic contact with managers training new employees that come in et cetera.
And like I said that could be a very large initiative for us most of the number of our peers have.
Rone entirely through that process and we look forward to.
Now that we have the technology to be able to compete in that environment also.
Thanks, that's helpful Russ and that second one I'm curious in the macro environment.
What could happen to take some pressure off your core consumer.
I mean, what what do they need to occur to get more.
I guess active.
But as I mentioned, we've been.
So I'm, making sure there is a good question one of the things that I think caught a good number of us in this industry.
Was there.
Severe impact of the end of stimulus.
And I think in the back of our minds are always concerns you know what's the next thing that can happen, obviously significant inflation is still out there starting to decrease but now that we have some other federal programs that are turning off whether it's about.
Yeah, Repaying school loans et cetera that we just want to make sure that we're not in a position that we're going to be.
Beyond our heels, if there is a significant change in consumer behavior.
Thanks that makes sense that's it from me guys. Thanks for the time.
Thank you Scott.
Thank you. Our next question comes from the line of Michael Diana with Maxim Group. Please proceed with your question.
Thank you Ross.
Uh huh.
You, obviously have multiple channels and then one other channels you were describing some changes you're making.
Sure it really kick in in the fourth quarter holiday season.
Sure, it's like shopper channels could could you just go over that again.
Sure of course.
So one of the Oh, what we have noticed is that the number of visitors to our sites that eventually either convert them because they're new unique visitors are repeat because there.
Existing customers is just a very small percentage of the traffic that comes to our site and the hypothesis is that consumers are looking for.
A credit option, but when they see the lease to own costs that there.
Looking around their examining the site and then eventually they decide that they feel like it's too expensive for given there what they think their cost of credit should be.
So by adding additional financing options to check outs.
And it's not necessarily a choice for the consumer based upon the scoring that we do internally will decide what is the financing option that makes the most sense for them, but what that will enable us to do is have a range of options.
Some of which might be as low as 10% APR and then expanding into our lease to own product by having a wider net yeah, we're no longer.
Longer flex shopper or no longer just be a place where people come and get the lease to own financing, it's a site where consumers can come and receive a variety of different credit options from.
Like I said, a very low APR.
The ability to use their own credit card if they decide to do so and then also being able to transition in the case of what our core consumers do now into this higher price lease to own product, but I think by giving a wider assortment of options, we really are providing flexible.
Flexible shopping options to these consumers and should hopefully increase conversion rates substantially.
Okay, and that's that's gonna be rolled out ready to go for.
The fourth quarter holiday season.
That's correct.
Okay.
Okay and then in your enterprise.
I think you were saying you're your two biggest customers are.
Those programs are growing.
Just just because the.
Are the customers.
Or that your enterprise empty seats themselves are doing more business is is that part of the growth there.
Correct, not only doing more business, but there also are a large.
Large 10 year partners that are growing through acquisitions themselves.
We've had one partner that is increase their store count from about 900 locations to 1500 locations through acquisitions and we benefit.
Benefit from that also.
Okay great.
Alright, thank you.
Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Hydro for any final comments.
Thanks, everyone for dialing in this morning, we look forward to a terrific second half of the year.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.