Q3 2023 Katapult Holdings Inc Earnings Call

November 8, 2023

[music].

Greetings and welcome to the Caterpillar third quarter 'twenty to 'twenty three earnings call. At this time, all participants are in a listen only mode.

Question and answer session will follow the fill all presentation at.

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 call. Please go ahead.

Welcome to catapult <unk> third quarter 2023 conference call on.

On the call with me today are Orlando's diet, Chief Executive Officer, Nancy Walsh, Chief Financial Officer, and Dirk Mcmahon Chief operating officer.

For your reference we have posted material 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 that this call will contain forward looking statements based on our current assumptions expectations and beliefs, which can cause.

Our future financial performance and financial results and are 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 September 32023, as long as the subsequent periodic and current reports the company files with the SEC.

These statements reflect management's current beliefs assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements.

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.

During today's discussion the company will provide certain financial information they 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.

Reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures 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 and thank you to everyone joining us this morning.

I'm excited to give you an update on our progress this quarter, which illustrate the value we are creating for our merchant partners and their enhanced experience, we're delivering for our loyal customers.

Our third quarter results represented another strong period of growth for catapult.

Well Nancy will give you more details on our financial performance as well as our outlook for continued growth in the fourth quarter, Let me set the stage.

Despite the ebb and flow of macroeconomic headwinds that caused the consumer to pull back on retail spending during the late summer we delivered our fourth consecutive quarter of year over year gross origination growth, which was up 12, 5%.

This is also what we would consider to be a breakout quarter for revenue growth.

Revenue was up nearly 10% year over year more than tripling the year over year revenue growth, we achieved last quarter.

In addition by coupling our topline growth.

With continued focus on disciplined expense management, we were able to deliver a positive adjusted EBITDA, which improved substantially compared to last year.

Our progress this quarter was driven by strong performance across our strategic pillars focused on one expanding our merchant base and deepening our existing merchant relationships.

Two growing our consumer reach by focusing mainly on doing more with our current customers, but taking measured steps to bring more consumers to our platform and three continuing to leverage our technology to support our merchant and consumer goals, while expanding our competitive moat.

Let's start with our progress on the merchant front this quarter.

The success of our merchants strategy lies in three key areas driving gross origination growth through direct integration gaining.

Gaining market share with our anchor merchant and ensuring that our platform offers a wide variety of durable goods consumers.

We're looking for.

During the third quarter, we continued to make steady progress with our strategy to grow a number of merchants, where catapulted and integrated payment option at checkout.

We successfully launched our online Casper integration and we expect to finish our in store integration in the first half of 2024.

In addition, we have also added Casper to catapult PE, creating yet another avenue for our customers to shop with this leader in sleep products. The mattress category is important to us and we are pleased to partner with Casper to give our consumers even more shopping choices.

So far our direct integration with Casper is off to a good start.

These types of partnerships not only expand the depth of durable goods coverage, where catapult as an integrated payment option. They also allow us to acquire new customers at a very low cost.

I also want to highlight an upcoming waterfall integration with synchrony financial and we recently finalized.

This integration is expected to kick off in early 2024 at which time synchrony will begin leveraging our innovative <unk> solution and our digital waterfall application process.

Everybody, who works with a significant number of retailers and auto <unk>.

<unk> appliances home furnishings home improvement and jewelry categories, which are some of our top categories.

This integration will enable synchrony retail partners to offer our lease to own option to their customers and opened the door for us to launch new merchant relationships at scale more easily.

Creating a seamless experience with synchrony. This waterfall, we can leverage this new relationship to drive growth in the future.

We continue to look for opportunities to deepen our partnerships with our existing merchants and the work we're doing with wafer is a great example of how we can grow these relationships.

For example, during the third quarter, we did a lot of AB testing with way fair and created targeted offers for high quality customers to improve their take rates.

We define take rates as a percentage of wafer customers, who originate with us divided by the number of customers who are approved or at least with us.

Just to give you. An example of this impact we can have when we made a few changes to how the customer facing offer was display we saw a nice improvement in take rate just from that update.

We look at take rate as a core metric for our relationships with merchants and we're always trying to optimize the customer and merchant experience to drive this higher.

The results are encouraging and helped drive our growth with wafer in this quarter.

Originations for wafer were up nearly 16% year over year more than double the growth we achieved during the second quarter.

Take rates also grew and were up mid teens year over year.

And this growth was also accompanied by higher application volume from widespread shoppers as well as higher same day take rate.

Our strong growth with wafer indicates that we are gaining market share and their U S business and we believe this progress is evident that our strategy is working well.

We are taking our learnings from weight there to create customize offerings for other direct merchants to help drive volumes.

Let me now provide an update on our customer focused activity and progress this quarter, starting with catapult pack.

We launched our catapult pay feature and our general App about a year ago.

Over the past 12 months, we've learned a lot and based on catapult pays early track record of performance. We believe it will be an important part of our future growth.

As a reminder, catapult pay as the feature in our App and is powered by a virtual credit card technology.

Each time, a customer uses catapult pay an entrance into a new lease we create a unique one time use card number that can be used at the store's checkout.

Our advanced capabilities allow us to create models that predict whether a durable goods is leasable.

This is a highly specialized capability requiring a lot of technical knowhow and expertise.

In other words catapult pay is a very special offering and we believe that distinguishes us from the competition.

Since launching catapult pay last year, we have continued to grow the number and variety of merchants with whom customers can shop within our app.

This quarter, we had a target to the list of merchant.

Already includes retailers like home depot, Amazon ways are best buy H P Ikea and law.

Truly making our app marketplace a shopping destination.

I encourage you to download the App, if you haven't already to see it firsthand.

We look at catapult pay and direct integrated merchants as complementary go to market channels for us together they allow us to meet consumers wherever they are shopping directly what the merchants are using our marketplace as our starting point.

We measure our progress with catapult pay across several metrics.

One metric that we are watching very closely is the penetration rate of our customer base.

In other words, how many of our customers have downloaded and engaged in the app.

This has increased substantially since our launch and our penetration rate is now in a low double digits range.

In addition, we track the percentage of originations that come through catapult specifics.

Specifically.

And this has grown nicely over the past 12 months.

Features like catapult pay allow us to create more opportunities to interact with and communicate with our customers.

With higher engagement, we were able to create more meaningful long term relationships with our customers. This in turn is allowing us to grow our lifetime value or LTV of our customers.

In fact for repeat customers, who generated new leases through catapult PE, we estimate that their LTV is about 48% higher than it would have been if we didn't have catapult that and these customers originated approximately 58% more leases.

Catapult pay users are very high quality customers for.

They have high repeat rates are also more likely to cross shop, two characteristics that are increasing their LTV with us.

Beyond these important contribution catapult pay is allowing us to get merchants on our platform more quickly and gather data that helps demonstrate catapult the value proposition to these merchants.

This is a win for merchants and customers alike.

Right now we are leveraging catapult PE to drive engagement with our existing customers, but we are seeing new customers coming to us who the feature and we see a path using catapult peg for customer acquisition in the future.

Beyond this feature our catapult App in general has become a great engagement tool and its own right.

In Q3, approximately 40% of our originations whether they were done through catapult pay merchant or a directly integrated merchant started in our app.

We believe this engagement shows that in just one year, we have already demonstrated the value of the catapult app to our customers. We are extremely proud of our progress.

This is a great segue and the progress we've made growing our customer base as you've heard so far we are expanding where and how consumers can shop, using catapult and looking for opportunities to monetize our platform through a variety of partnerships that bring us new customers or leverage our technology to create new revenue streams.

One such partnership that we're excited to announce as our new pilot with Western Union just a few weeks ago, we launched a partnership which physicians catapult as the preferred L. T O provider for Western Union customers. This means western Union will actively promote catapult and help us introduce our innovative.

L T O solution to their millions of active users across the U S.

We believe that we have a lot of overlap from a customer demographic perspective, with western Union and that this partnership will help us build brand awareness with a large untapped base of potential catapult customers.

We believe that Western Union chose catapult because our solution offers fair transparent and flexible terms that will empower their users with financial resources to get the durable goods they need when they want them.

Under the terms of our agreement, we will pay Western Union, a referral fee for each customer they help us acquire that originates at least with us.

Our waterfall relationships on the merchant side partnerships like this will create an opportunity for catapult to build low cost ROI positive consumer referral channels and.

Similar to catapult PE.

This is yet another opportunity for us to control our destiny when it comes to growing our customer base.

As we continue to look for opportunities to grow we remain pleased with the performance of our existing customers. During the third quarter, we achieved very strong repeat rates, which are defined as the percentage of end quarter originations from existing customers Approx.

Approximately 51, 3% of customers in the third quarter or repeat.

And with an NPS score of 58, we feel confident that they are happy with their catapult experience a driving factor of why they come back again and again to do business with us.

Lastly on the customer front, we had a few consumer marketing updates that I'd like to highlight.

Throughout the third quarter, we introduced new capabilities that will be fueled by the data we're collecting from our mobile app and other direct to consumer App. We expect these tools to increase our ability to leverage email SMS and in App notifications to enhance conversion rate and provide insight on how.

Best to allocate our resources in this area.

Ultimately our goal is to optimize customer journeys and based on initial results. We're seeing we're excited about the potential these tools.

To help accelerate our consumer marketing efforts.

While we are still in the early phase of consumer marketing strategy, we believe our prudent approach coupled with our current and future partnerships will prove to be a winning combination and support our efforts to grow our customer base before I turn it over to Nancy to go through our financial results and fourth quarter outlook I want to spotlight. Some progress we've made on the <unk>.

<unk> front and why we believe our technology sets us apart from the crowd.

I've already talked a bit about why our catapult pay feature is so unique from a consumer experience perspective, but.

Let me put this into context on how our technology is creating a competitive moat for catapult.

When our models predict.

If a durable good as leasable this technology has to be deployed across every merchant.

We have built dynamic and disciplined models that support our underwriting across all of our category coverage.

Electronic merchants are different from furniture merchant, which are different from jewelry merchants for example.

This means that we must understand each merchants catalog within the context of their category and then teach our model to understand their specific catalog.

And that's just the beginning we also continuously update the model to address the many exceptions to our rules.

These updates are actually the secret sauce of our technology and so novel.

And we recently filed a patent around catapult PE in the area of leasing both detection to protect our intellectual property.

There is not a lot of patents in this area and we're proud of the work our team is doing to protect our competitive positioning.

This technical Knowhow and massive amounts of data we've collected over years.

Our technology apart from our competitive landscape.

And we will continue to look for opportunities to both monetize and protect our tech lead.

As I mentioned earlier, we've got a lot of AB testing this quarter and our tech team is pivotal and allowing us to accelerate this important work.

The way for example, as I provided you earlier when we create targeted offers to drive take rates higher for example would not be possible. If we didn't have best in class technology.

Finally, I'm excited about our exploration of generative AI, which we believe will allow our teams to remain on the leading edge of technology.

We believe we can leverage generative AI to optimize our processes accelerate our progress using the same or fewer resources and create an even more scalable tech infrastructure.

Here at catapult.

Preapproval to approval and throughout their lifetime with us our technology powers, our ability to deliver a great customer journey, while creating great business outcomes.

In summarizing our third quarter, we're really proud of our steady progress.

We have a multi pronged growth strategy that is delivering sustainable growth.

On the merchant side, we are enhancing our shop ability.

Through new direct integrations and merchant additions to catapult pay while exploring opportunities to help drive even more growth with our current merchant.

At the same time, we're also nurturing our customer base with new features and targeted marketing campaigns that are driving take rate and engagement.

With these solid fundamentals in place. We're also embarking upon new partnerships such as the one with Western Union that are creating new channels for ROI positive customer acquisition.

Finally, we continue to build and protect our technology lead and we are exploring opportunities to leverage our data proprietary technology and industry know how to drive growth.

Meet the unique and emerging needs of our merchants and meet customers wherever they are shopping.

With that I'll turn it over to Nancy Nancy.

Thank you Orlando.

Excited to talk to you today about our strong third quarter results, which are added to our track record of growth.

Four consecutive quarters, we have grown our gross originations year over year and in the third quarter, we more than tripled our revenue growth compared with Q2.

And more than $4 million in year over year improvement to adjusted EBITA.

And we've achieved this growth against the backdrop of macroeconomic headwinds and growing consumer concerns about the economy.

That is the context, let me provide you with some financial highlights for the third quarter of 2023.

Gross originations increased 12, 5% you every year to $49 $6 million.

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

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

We've continued to see healthy results from our direct merchant and catapult pay merchant, we did face macro headwinds and a few timing challenges during the quarter.

Specifically, we saw retail slow in August and early September before picking back up again, and we had one key integration that took a bit longer to launch to be anticipated.

Our integrations are heavily dependent on our partner's resources and schedules, which can often often shift after the launch schedule has been planned.

Catapult portfolio of direct merchants provides the funnel of new customers to drive gross originations at minimal customer acquisition costs.

And now with our Western Union partnership we expect to have another low cost channel to acquire new customers.

During the quarter approximately 51% of our originations came from existing customers. This is consistent with the 51% we reported in Q2.

Our customers are highly engaged and we believe we are fostering engagement with our powerful mobile app.

As Orlando mentioned nearly half of our gross originations in the third quarter began and the App.

One year post the launch of our App and the Catapulting feature we are very excited about the long term potential.

We are driving engagement and delivering a best in class experience to our customers.

One last note on our grocery originations growth.

Analyzing this metric it is important to recognize to be achieved strong double digit growth within the constraints of our dynamic underwriting model risks and controls, which led to a lower approval rate year over year.

Revenue increased nine 8% year over year to $55 $3 million exceeding the 5% to 7% growth outlook, we provided last quarter.

This strong performance reflects the trends driving gross originations that I just mentioned as well as the volume performance. We saw in the first half of the year.

Write offs as a percent of lease revenue were about flat compared with Q2 and came in at nine 3%.

During Q3, we started this metric peak in July and then come down steadily during the rest of the quarter.

Our long term target to write offs as a percentage of revenue was 8% to 10% and we are comfortably within this range.

We continued to benefit from our focus on disciplined expense management during the quarter, we lowered our overall operating expenses by 11, 5% compared with Q2, 2023, and 27% year over year.

Excluding underwriting fees and servicing costs, which are variable and depreciation and noncash stock based compensation expense, our fixed cash operating expenses were $9 million down 31, 8% compared to last year.

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

For the third quarter, we recorded positive adjusted EBITDA of $2 million, which was a $4 $3 million improvement compared with the $2 $3 million loss reported in the third quarter of last year.

To put a finer point on our progress towards sustained profitability. Our Q3 results mean that we have delivered $14 million more in adjusted EBITDA year to date than we did in the same period of 2022.

As of September 32023, we had total cash and cash equivalents of $32 $2 million, which excludes $6 $7 million of restricted cash and we feel comfortable that our cash position and our credit facility provide us with the resources, we need to support our growth strategy.

As you've heard like other companies, we're navigating a dynamic and sometimes volatile macro environment, while they were a tailwind such a stable inflation rate and a reduced likelihood of a recession in the U S.

There are also a number of headwinds.

Retail traffic is down interest rates remain elevated lending standards are tight and there was uncertainty about how the resumption of student loan repayments will impact our core customer.

And well at least your own solutions has historically benefited when prime credit options become less available. We believe this mixed bag of economic indicators led to a slowdown in retail activity mid third quarter.

I believe it could be temporarily dampening some consumer demand for many of the durable goods that are leased at both through catapult.

Based on this macro outlook and our operating plan for Q4 2023, we expect to deliver.

A 3% to 5% year over year increase in gross originations, which would be the fifth consecutive quarter of year over year growth.

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

We also expect revenue to grow 13%, 15% year over year compared with the fourth quarter of 2022.

Lastly, we expect our adjusted EBITDA performance to continue to improve significantly compared with the fourth quarter of last year, reflecting our revenue growth expectations and sustained reduction of our fixed cash operating expenses.

We expect to reduce fixed cash opex by approximately 25% year over year.

For the full year this translates to an outlook of 12% to 13% gross origination growth.

Three to four 5% revenue growth and meaningful improvement in adjusted EBITDA, which as of the third quarter has already increased by $14 million year to date versus the same period of 2022.

During the third quarter, we believe our performance distinguished us from a competitive landscape we.

We delivered our fourth consecutive quarter of gross originations growth, which translates to $159 million in gross originations year to date and double digit revenue growth for the quarter.

And we drove this topline growth performance against the backdrop of continued disciplined expense management, which has allowed us to deliver substantial improvements to adjusted EBITDA profitability.

A clear growth strategy, a well defined operating plan that we're executing against and a healthy balance sheet that provides us with the financial for them, we need to fund our pipeline of origination.

We feel confident that we are well positioned for continued growth as we march toward profitability.

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

Operator.

Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad it.

Confirmation tone will indicate your hurdle is there. The question is do you know.

Press Star two if you would like to remove or a question from the queue.

For participants.

Because of equipment it may be necessary to pickup your handset before pressing Dave Starkey.

And our first question comes from Josh singular with cancer cancers Sharron.

Sure.

This is Willie Carlson on for Josh Ah Congrats on the quarter I wanted to ask could you guys provide any additional color on just kind of a partnership with synchrony financial and I was kind of hoping you guys monetize their customer base and if you expect to see additional partnerships like this in the future.

Yeah, Hi, well Orlando. Thanks for the question Yeah, I mean, we we have kind of been on the forefront of the waterfall integration you know we did it with a firm in the past and we like the waterfall because what it does is it brings.

Those declines that come from a prime lender.

To us electronically easily seamlessly.

To help drive more approvals for the for the retailer as well as an additional incremental volume and so it's just one more step we always talked to many of the prime lenders about doing an integration whether it's through a third party waterfall or a direct integration.

This one is pretty exciting because you know synchrony has.

Tons of of retailers that fit our profile perfectly you know their approval rates are not 100% I don't think any prime lender has 100% approval. So so we can see the increase in applications that come in the way that it's going to work as a retail are still has to say, yes, I want to be on the waterfall.

And so you know we're gonna team up together to go out to talk to the retailers that have durable goods.

Make sure that they're they see the offer.

I see the opportunity to add us on their waterfall and to be able to get that integration done. So there's some work to do by selling the retailers, but I think it's a great partnership I'm real proud that we were able to get through this oh I get this partnership done and we're going to continue to look for others. I mean, there's a lot of opportunity because as I said.

The prime lenders don't approve everyone and this is a great way to get into a retail.

Thanks, and then second second follow up question was just back on the Casper partnership and how you kind of expect that to ramp up through the first half of 2024.

Yes, we're excited about that one because <unk> been in the online Memphis business for a long time and you know they made an announcement a while back that they were gonna be adding stores storefronts and I visited a few of them. It's a simple mall operation and financing is a big part of their business and they realize that.

Yeah. They are prime lender is affirm that affirmed again doesn't improve everybody. So we expect to have we have the online integration done will.

We will be working in the first quarter to get the in store integration and the in store integration I think it's going to be unique.

Compare to others in the we're still keeping the clarity of the transparency of our product in the customers hands. So that they can make the decision and see exactly what the terms and conditions are in execute that seamlessly it very quickly.

And clearly and transparently. So we're excited about that integration and training in the stores on how to offer leasing to their customers.

And really sets us set us apart I think in not only in the mattress business, but I think this will just be a good step forward and some of the other lease to own brick and mortar stores that have e-commerce, plus brick and mortar.

Great. Thank you for taking my questions Alright.

Alright, Thank you will.

Hey, Kevin Ladies and gentlemen, if you would like to pose a question. Please press star one.

And our next question comes from Anthony <unk> with loop.

Capital market.

Go ahead.

Good morning, and congrats on a strong quarter continuing the momentum I guess I just had a couple questions maybe I'll just take them one at a time.

First thing so it was a very strong quarter don't mean to nitpick.

But your guidance for.

<unk> growth was 14 to 16 percentage came up a little bit light of that I'm, assuming it was that sort.

Sort of slowdown that you referred to during your prepared remarks, but just wanted to see if there was any additional color you could you can provide on that.

Hi, Anthony its Nancy. Thank you for your question, Yes, exactly what you said it was that slowdown that we saw in August going into early September and then we talked about there was one integration that just took a little bit longer compared to what we had projected so the business is still really strong we feel very good about what we've achieved year to date.

And we are continuing on our growth trajectory five quarters of consecutive growth down with what we projected for our Q4 outlook.

Got it that's helpful and then second question.

On Western Union, and I understand about the referral fees, but like how exactly I'm just trying to sort of dimensionalize this or sort of think about how this work practically like how exactly is western union going to be going to be marketing catapult like like like just walk me through the logistics the practical logistics of that.

Okay.

Thanks, Anthony This is Derrick I'll take this question so base.

Basically just to summarize a little bit of our perspective a little.

Again on this is that we've really seen that our level of engagement with consumers just continues to increase.

And there's clearly demand in the non prime segment for choice and their transaction.

So the lease to own, especially now that we have the mobile app, where consumer can shop at.

Fantastic tier one retailers national retailers and finance any durable good thing that they could want to do this.

This marketplace that we've developed.

So as we discussed with partners like Western Union about where there's overlap in our customer base and what that can do for both of our communities in terms of enabling more transaction option. It was just a win win for both of them.

Given a new capability for Westwood.

Now to introduce that opportunity you've got to engage with them.

Where they are western Union has properties.

Digital properties through the website mobile apps, that's wrong that there'll be introducing catapult through various advertising and collaborations to have with us that will engage consumer to click through and and engage with our mobile app.

And it's early days, but I think the signals for us.

One that we are.

Were really resonating with consumers and opening up new channels for us to access consumer community and we're delivering value to us and other partners who have.

Large communities on customers. So we're really excited about where this can take us in standby as we learn more Anthony.

Last quarter I mentioned.

Our strategy going forward is to expand the pie of customers and it.

Numerous ways, obviously, a direct integration.

Waterfall innovation or partnership.

And this is the third prong of that expansion of getting new customers.

Alright.

Got it that's helpful. And then just one last question for me just any any updates in terms of the.

Talked about the Casper integration, but any.

<unk> in terms of the new retail partners that you signed on in in the.

Third quarter or just a potential partnerships in the pipeline.

Yeah.

One question, Yes, we are obviously have a strong pipeline of not only.

Synchrony.

Our retailers', new retailers that are new to us, but also on the on the partnership front. So we're kind of attacking it on all three fronts and and I'm looking forward to 2024 and getting some of these integrations done video partnership wanted to least easier integration than a direct integration waterfall.

One with.

With synchrony will be a much easier integration to add retailers at a quicker pace.

That's helpful. Good luck for the remainder of the year.

Alright, Thanks, Dan Thank you.

There are no further questions at this time I would like to turn the floor back over to Orlando's eyes Hale for closing comments. Please go ahead.

Thank you before we sign off I want to acknowledge the amazing catapult team I'm. So grateful to work with our team and is so focused on winning and delivering for our customers and merchants. Thank you for your hard work and dedication you are the most important ingredient of our success to everyone listening. Thank you so much for tuning in to hear about the progress we've made over the past quarter.

We are proud of our ability to grow while providing our customers with a fair transparent and accessible lease to own product and our merchants, where the growth channel that has so much potential.

We look forward to chatting with the Wall Street community throughout the quarter and providing a next update after our fourth quarter concludes we plan to participate in the Stephens annual investment conference in Nashville next week, and we hope to see you. There. If we cant meet you in person you can access a live webcast and replay of our fireside chat on our IR website.

Thanks again for your support and interest in our story.

This concludes today's conference call.

<unk> disconnect your lines at this time, thank you for your participation and have a great day.

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Greetings and welcome to the Caterpillar third quarter 2023 earnings call. At this time, all participants are in a listen only mode.

The first 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 being recorded.

It is now my pleasure to introduce your host Jim.

Please go ahead.

Welcome to catapult <unk> third quarter 2023 conference call.

On the call with me today are Orlando's diet, Chief Executive Officer, Nancy Walsh, Chief Financial Officer, and Derek Medline, Chief operating officer.

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

Our future financial performance and financial results and are 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 September 32023, as well as the subsequent periodic and current reports the company files with the SEC.

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.

During today's discussion the company will provide certain financial information the 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.

With that I will turn the call over to Orlando.

Thank you Jennifer and thank you to everyone joining us this morning.

I'm excited to give you an update on our progress this quarter, which illustrates the value we are creating for our merchant partners and enhanced experience, we're delivering for our loyal customers.

Our third quarter results represented another strong period of growth for catapult.

Well Nancy will give you more details on our financial performance as well as our outlook for continued growth in the fourth quarter.

Let me set the stage.

This is also what we would consider to be a breakout quarter for revenue growth.

Revenue was up nearly 10% year over year more than tripling the year over year revenue growth, we achieved last quarter.

In addition by coupling our topline growth.

With continued focus on disciplined expense management.

Able to deliver a positive adjusted EBITDA, which improved substantially compared to last year.

Our progress this quarter was driven by strong performance across our strategic pillars focused on one expanding our merchant base and deepening our existing merchant relationships too.

Let's start with our progress on the merchant front this quarter.

The success of our merchant strategy lies in three key areas driving gross origination growth through direct integration.

Gaining market share with our anchor merchant and ensuring that our platform offers a wide variety of durable goods consumers.

We are looking for.

During the third quarter, we continued to make steady progress with our strategy to grow a number of merchants where catapult.

An integrated payment option at checkout.

We successfully launched our online Casper integration and we expect to finish our in store integration in the first half of 2024.

So far our direct integration with Casper is off to a good start.

These types of partnerships not only expand the depth of durable goods coverage, where catapult as an integrated payment option.

They also allow us to acquire new customers at a very low cost.

I also wanted to highlight an upcoming waterfall integration with synchrony financial and we recently finalized.

This integration is expected to kick off in early 2024 at which time <unk> will begin leveraging our innovative <unk> solution and their digital waterfall application process.

Theyre currently works with a significant number of retailers and auto electronics appliances home furnishings home improvement and jewelry categories, which are some of our top categories.

This integration will enable synchrony retail partners to offer our lease to own option to their customers and opened the door for us to launch new merchant relationships at scale more easily <unk>.

Creating a seamless experience with securities waterfall, we can leverage this new relationship to drive growth in the future.

We continue to look for opportunities to deepen our partnerships with our existing merchants and the work we're doing with wafer is a great example of how we can grow these relationships.

For example, during the third quarter, we did a lot of AB testing with way fair and created targeted offers for high quality customers to improve their take rates.

Define take rate as a percentage of wafer customers, who originate with us divided by the number of customers who are approved for a lease with us.

Just to give you. An example of this impact we can have when we made a few changes to how the customer facing offer was display we saw a nice improvement in take rate just from that update.

We look at take rate as a core metric for our relationships with merchants and we are always trying to optimize the customer and merchant experience to drive this higher.

The results are encouraging and helped drive our growth with wafer this quarter gross originations for wafer were up nearly 16% year over year more than double the growth we achieved during the second quarter.

Take rates also grew and were up mid teens year over year.

And this growth was also accompanied by higher application volume from widespread shoppers as well as higher same day take rate.

Our strong growth with wafer indicates that we are gaining market share and their U S business and we believe this progress is evident that our strategy is working well.

We are taking our learnings from way there to create customized offerings for other direct merchants to help drive volumes.

Let me now provide an update on our customer focused activity and progress this quarter, starting with catapult pack.

We launched our catapult pay feature and our general at about a year ago.

Over the past 12 months, we've learned a lot and based on catapult pays early track record of performance. We believe there will be an important part of our future growth.

As a reminder, catapult pay as the feature in our App and is powered by a virtual credit card technology.

Each time, a customer uses tactical PE and entered into a new lease we create a unique one time used card number that can be used at the store's checkout.

Our advanced capabilities allow us to create models that predict whether a durable goods and leasable.

This is a highly specialized capability requiring a lot of technical knowhow and expertise.

In other words catapult pay is a very special offering and we believe that distinguishes us from the competition.

Since launching catapult pay last year, we have continued to grow the number and variety of merchants with whom customers can shop within our app.

This quarter, we had a target to the list of merchants that already includes retailers like home depot Amazon ways are best by HP Ikea and law.

Truly making our app marketplace a shopping destination.

I encourage you to download the App, if you haven't already to see it firsthand.

We measure our progress with catapult pay across several metrics.

One metric that we are watching very closely is the penetration rate of our customer base.

In other words, how many of our customers have downloaded and engaged in the app.

This has increased substantially since our launch and our penetration rate is now in a low double digits range.

In addition, we track the percentage of originations that come through catapult.

Specifically.

And this has grown nicely over the past 12 months.

Features like catapult <unk> allow us to create more opportunities to interact with and communicate with our customers.

With higher engagement, we're able to create more meaningful long term relationships with our customers. This in turn is allowing us to grow our lifetime value or LTV of our customers and.

In fact for repeat customers, who generated new leases through catapult PE, we estimate that their LTV is about 48% higher than it would have been if we didn't have kind of OPEC and these customers originated approximately 58% more leases.

Catapult pay users are very high quality customers for.

They have high repeat rates are also more likely to cross shop, two characteristics that are increasing their LTV with us.

Beyond these important contribution catapult pay is allowing us to get merchants on our platform more quickly and gather data that helps demonstrate catapult value proposition to these merchants.

They can go win for merchants and customers alike.

Beyond this feature our catapult App in general has become a great engagement tool and its own right.

In Q3, approximately 40% of our originations whether they were done through catapult pay merchant or directly integrated merchant started in RF.

We believe this engagement shows that in just one year, we have already demonstrated the value of the catapult app to our customers. We are extremely proud of our progress.

This is a great segue into progress we've made growing our customer base as you've heard so far we are expanding where and how consumers can shop, using catapult and looking for opportunities to monetize our platform through a variety of partnerships that bring us new customers or leverage our technology to create new revenue streams.

One such partnership that we're excited to announce as our new pilot with Western Union just a few weeks ago, we launched a partnership which physicians catapult as the preferred <unk> provider for Western Union customers. This means western Union will actively promote catapult and help us introduce our innovative.

<unk> solution to their millions of active users across the U S.

We believe that we have a lot of overlap from a customer demographic perspective with western Union.

This partnership will help us build brand awareness with a large untapped base of potential catapult customers.

Under the terms of our agreement, we will pay Western Union, a referral fee for each customer they help us acquire that originates at least with us.

Like our waterfall relationships on the merchant side partnerships like this will create an opportunity for catapult to build low cost ROI positive consumer referral channels.

And similar to catapult PE.

This is yet another opportunity for us to control our destiny when it comes to growing our customer base.

Approximately 51, 3% of customers in the third quarter or repeat.

And with an NPS score of 58, we feel confident that they are happy with their catapult experience a driving factor of why they come back again and again to do business with us.

Lastly on the customer front, we had a few consumer marketing updates that I would like to highlight.

Best to allocate our resources in this area.

Ultimately our goal is to optimize customer journeys and based on initial results. We are seeing we're excited about the potential these tools.

To help accelerate our consumer marketing efforts.

<unk> front and why we believe our technology sets us apart from the crowd.

I've already talked a bit about why our catapult pay feature is so unique from a consumer experience perspective.

Let me put this into context on how our technology is creating a competitive moat for caterpillar.

When our models predict.

If a durable good as leasable this technology has to be deployed across every merchant.

We have built dynamic and disciplined models that support our underwriting across all of our category coverage.

Electronic merchants are different from furniture merchant, which are different from jewelry merchants for example.

This means that we must understand each merchant catalog within the context of their category and then teach our model to understand their specific catalogs.

And that's just the beginning we also continuously update the model to address the many exceptions to our rules.

These updates are actually the secret sauce of our technology and so novel.

And we recently filed a patent around catapult PE in the area of leasing both detection to protect our intellectual property.

There is not a lot of patents in this area and we're proud of the work our team is doing to protect our competitive positioning.

This technical Knowhow and massive amounts of data we've collected over years.

Our technology apart from our competitive landscape.

And we will continue to look for opportunities to both monetize and protect our tech lead.

As I mentioned earlier, we've got a lot of AB testing this quarter and our tech team is pivotal and allowing us to accelerate this important work.

The wafer examples that I provided you earlier when we create targeted offers to drive take rates higher for example would not be possible. If we didn't have best in class technology.

Finally, I'm excited about our exploration of generative AI, which we believe will allow our teams to remain on the leading edge of technology.

We believe we can leverage generative AI to optimize our processes accelerate our progress using the same or fewer resources and create an even more scalable tech infrastructure.

Here at catapult.

Im preapproval to approval and throughout their lifetime with us our technology powers, our ability to deliver a great customer journey, while creating great business outcomes.

In summarizing our third quarter, we're really proud of our steady progress.

We have a multi pronged growth strategy that is delivering sustainable growth.

On the merchant side, we are enhancing our shop ability through new direct integrations and merchant additions to catapult pay while exploring opportunities to help drive even more growth with our current merchant.

At the same time, we're also nurturing our customer base with new features and targeted marketing campaigns that are driving take rate and engagement.

With these solid fundamentals in place. We are also embarking upon new partnerships such as the one with western Union that are creating new channels for ROI positive customer acquisition.

Finally, we continue to build and protect our technology lead and we are exploring opportunities to leverage our data proprietary technology and industry know how to drive growth.

<unk> unique and emerging needs of our merchants and meet customers wherever they are shopping.

With that I'll turn it over to Nancy Nancy.

Thank you Orlando.

Excited to talk to you today about our strong third quarter results, which have added to our track record of growth.

Four consecutive quarters, we have grown our gross originations year over year and in the third quarter, we more than tripled our revenue growth compared with Q2, resulting in more than $4 million in year over year improvement to adjusted EBITDA.

We've achieved this growth against the backdrop of macroeconomic headwinds and growing consumer concerns about the economy.

With that as context, let me provide you with some financial highlights for the third quarter of 2023.

Gross originations increased 12, 5% year over year to $49 $6 million.

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

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

While we have continued to see healthy results from our direct merchant and catapult pay margin, we did face macro headwinds and a few timing challenges during the quarter.

Specifically, we saw retail slow in August and early September before picking back up again, and we had one key integration that took a bit longer to launch than we anticipated.

Our integrations are heavily dependent on our partner's resources and schedules, which can often often shift after the launch schedule has been planned.

Catapult portfolio of direct merchants provides a funnel of new customers to drive gross originations at minimal customer acquisition costs and now with our Western Union partnership we expect to have another low cost channel to acquire new customers.

During the quarter approximately 51% of our originations came from existing customers. This is consistent with the 51% we reported in Q2 or.

Our customers are highly engaged and we believe we are fostering the engagement with our powerful mobile app.

As Orlando mentioned nearly half of our gross originations in the third quarter began and the App.

One year post the launch of our App and the catapult feature we are very excited about the long term potential.

We are driving engagement and delivering a best in class experience to our customers.

One last note on our grocery originations growth.

Analyzing this metric it is important to recognize that we achieved strong double digit growth within the constraints of our dynamic underwriting model risks and controls, which led to a lower approval rate year over year.

Revenue increased nine 8% year over year to $55 3 million exceeding the 5% to 7% growth outlook, we provided last quarter.

This strong performance reflects the trends driving gross originations that I just mentioned as well as the volume performance. We saw in the first half of the year.

Write offs as a percent of lease revenue were about flat compared with Q2 and came in at nine 3%.

During Q3, we started this metric peak in July and then come down steadily during the rest of the quarter.

Our long term target to write offs as a percentage of revenue was 8% to 10% and we are comfortably within this range.

We continued to benefit from our focus on disciplined expense management during the quarter, we lowered our overall operating expenses by 11, 5% compared with Q2, 2023, and 27% year over year.

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

For the third quarter, we recorded positive adjusted EBITDA of $2 million, which was a $4 $3 million improvement compared with the $2 $3 million loss reported in the third quarter of last year.

As you've heard like other companies, we're navigating a dynamic and sometimes volatile macro environment. While there are a tailwind such a stable inflation rate and a reduced likelihood of a recession in the U S.

There are also a number of headwinds.

Retail traffic is down interest rates remain elevated lending standards are tight and there was uncertainty about how the resumption of student loan repayments will impact our core customer.

And while at least your own solution has historically benefited when prime credit options become less available. We believe this mixed bag of economic indicators led to a slowdown in retail activity mid third quarter.

I believe it could be temporarily dampening some consumer demand for many of the durable goods that are leased to bolster catapult.

Based on this macro outlook and our operating plan for Q4 2023, we expect to deliver.

A 3% to 5% year over year increase in gross originations, which would be the fifth consecutive quarter of year over year growth.

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

We also expect revenue to grow 13% to 15% year over year compared with the fourth quarter of 2022.

We expect to reduce fixed cash opex by approximately 25% year over year.

For the full year this translates to an outlook of 12% to 13% gross origination growth.

Three to four 5% revenue growth and meaningful improvement in adjusted EBITDA, which as of the third quarter has already increased by $14 million year to date versus the same period of 2022.

During the third quarter, we believe our performance distinguished us from a competitive landscape.

We delivered our fourth consecutive quarter of gross originations growth, which translates to $159 million in gross originations year to date and double digit revenue growth for the quarter.

We have a clear growth strategy, a well defined operating plan that we're executing against and a healthy balance sheet that provides us with the financial room, we need to fund our pipeline of origination.

We feel confident that we are well positioned for continued growth as we march toward profitability.

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

Operator.

Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question and answer.

You May press Star two if you would like to remove or a question from the queue.

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

And our first question comes from Josh Siegel with cancer cancers Sharron.

Alright.

This is will Carlson on for Josh Ah Congrats on the quarter I wanted to ask could you guys provide any additional color on just kind of a partnership with synchrony financial and how it's kind of hoping you guys monetize their customer base and if you expect to see additional partnerships like this in the future.

Yes, hi, well, it's Orlando. Thanks for the question Yeah, I mean, we have kind of been on the forefront of the waterfall integration, we did it with a firm in the past.

And we like the waterfall because of what it does is it brings those declines that come from a prime lender.

To us electronically easily seamlessly.

To help drive more approvals for the for the retailer as well as an additional incremental volume.

So it's just one more step we always talked to many of the prime lenders about doing an integration whether it's through a third party waterfall or a direct integration.

Q3 2023 Katapult Holdings Inc Earnings Call

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