Q3 2023 FlexShopper Inc Earnings Call
Greetings and welcome to the Flex shopper third quarter financial results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation if anyone should require.
Acquire operator assistance during the conference. Please press Star Zero on your telephone keypad. Please note. This conference is being recorded I would now.
I'll turn the conference over to your host Carlo sandwiches.
Investor Relations may begin.
Thank you and good morning, welcome to flex shoppers third 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 yesterday, and a corresponding Investor relations presentation. This morning and will be referencing these during the call today.
Both can be found in our Investor Relations section of our website.
We will be available for Q&A following today's prepared remarks.
Before we begin I would like to remind everyone that this call will contain forward looking statements regarding future events and our financial performance, including statements regarding our market opportunity the impact of our growth initiatives and future financial performance.
These should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC reports, including our quarterly report 10-Q for the quarter ending September 30th 2023. These statements reflect management's current beliefs assumptions and expectations and are sub.
To a number of factors that may cause actual results to differ materially from those statements.
As required by law, we undertake no obligation to publicly update or revise any of these statements whether as a result of new information future events or otherwise.
Today's discussion of our financial performance, we will provide certain financial information that contains non-GAAP financial measures under SEC rules. These include measures such as EBITDA net income and adjusted net income. These non-GAAP financial measures should not be considered replacements and should be read.
Together with our GAAP results reconciliation to GAAP measurements and certain additional information are also included in today's earnings release, which is available on the investors section of our website. This call is being recorded and a webcast will be available for replay on our Investor Relations section of our website I will now turn the call.
Over to our CFO Russ heiser.
Thanks, Carlos Good morning, everyone. Thank you for joining US yesterday, we reported Q3 financial results that are on the whole it could be better than prior quarter in the same quarter last year.
EBITDA increased over $11 million versus the same quarter last year and net income was up over $7 million versus the same quarter last year.
We continue to be in a difficult operating environment with inflation continuing to significantly impact our customer base are balanced by an economy still hasnt experienced meaningful job loss and the non prime sector.
Out of an abundance of caution we continue to be selective in our underwriting and are very active in monitoring and managing our portfolio provides significant cushion AC environment and customer payment behavior does start to move away from us.
Well historically, our customers have demonstrated resilience in a recessionary environment, we faced in certain times I want to be positioned for any negative shifts whether from the resumption of student loan payments are continued deterioration of the economy.
Like shopper has continued to evolve its direction over the last several months, we are leaning into the direct to consumer marketplace as our primary growth engine going forward. We have worked diligently over the last two quarters to evolve from utilizing our website solely as a method of generating leases. We are transitioning to a more fulsome ecommerce site that focuses on merchandising efforts to enable that.
The property not only from generating leases on our sites, but also capturing a retailer margin on more of our goods.
Furthermore, we have worked to increase conversion opportunities on our site by enabling risk based pricing initiatives and recognize that all of our customers are not the same or fit into a single lease to own offer while maintaining attractive asset level returns.
Setting that idea even further we are exploring partnerships with other financing channels provide even broader selection of purchase options to consumers that do not have the current liquidity to transact on more traditional e-commerce platforms.
Shoppers positioning yourself as a marketplace with an assortment of payment options for the larger universe of credit challenged consumers that will extend beyond the historical lease to own options.
In addition, we are utilizing generative AI tools to create smaller versions of our main site focused on product verticals. These micro sites are expected to provide significant marketing leverage that will allow us to reach and monetize customers decreased acquisition costs.
With all these changes in place we believe flex shopper in our marketplace will have greater control of its growth opportunities.
First it allows us to direct marketing spend where it is most efficient marketing spend online is only constrained by acquisition cost and achieving the appropriate return on capital like other verticals, where we might be dependent upon foot traffic to our store.
Second it allows us to be focused on achieving the ideal asset level return without trying to hit benchmark approval rates or spending limits as can occur with our enterprise customers. It.
It doesn't mean that we are continuing to grow the direct brick and mortar and online enterprise relationships and in fact, a lot of the technologies developed for our marketplace and providing more value to our large enterprise customers and permitting higher approval rates and conversion rates. Among these customers are enterprise experience continues to result in big wins and we are in the final stages of another thousand.
Plus store contract that will grow our enterprise leasing originations by at least 25%.
We just want to be thoughtful in terms of making sure that we don't chase new doors or originations instead stay focused on the bottom line.
Finally, the storefront lending business that we acquired late last year is gaining momentum as we have mentioned in the past. The goal is to develop a framework that can allow us to reach large non prime customer segments with our combination of state licensed and lease to own products complemented by other liquidity providers. We continue to believe that by providing the widest assortment of products.
And payment options to consumers, we can leverage and grow the exclusive arrangements, we have with a wider assortment of retailers and service providers.
Looking forward to the holiday season, and early next year, we expect to see continued growth in originations as a result of our improvements to the flex shopper marketplace and new enterprise partners.
And with a focus on asset level performance, our allowance for doubtful accounts as a percentage of gross billings will decline, resulting in a leap forward in net revenue.
The continued merchandising efforts should continue to increase the margin on our products, resulting in relative declines and the depreciation of lease merchandise. All of this will enhance gross profit over the near term the management team at Flex Shaffer believes we are at an inflection point in the business and look forward to demonstrating our progress going forward.
That I will turn the call over to our CFO John Davis.
Thanks, Ross, we continue to be pleased with the asset quality of both our lease and loan segments.
As we have mentioned in previous calls the transition from government stimulus coming out of the pandemic to a high inflationary environment was difficult for our customers.
During this time, our efforts were targeted towards improving bad debt levels on our lease channel.
Continuing to develop enterprise and smaller partnership distribution opportunities expand retail margins within our marketplace lease channel be a manufacturer and distributor partnerships.
<unk> to develop our state model lending business through a revolution finance platform I am pleased with the results of all of these activities just setting up flex shoppers to achieve sustainable profitable growth.
These fundings were 4% higher versus Q2 2023.
11% lower versus Q3 of 2022.
An important point to note is that September lease fundings were higher year over year, which was the first monthly positive comp since July of 2022.
October leased fundings were also higher year over year had the highest leased dollar funding for all of 2023.
Remember is also trending higher year over year as of the middle of the month.
Gross lease billings and fees were 19% lower year over year or $7 $3 million lower versus last year. As a reminder, this line item has a lag to fundings as this revenue is recognized over the term of the lease.
A key factor in the asset profitability of our lease business.
Include gross lease billings and fees provision for doubtful accounts depreciation and impairment of lease merchandise in market.
Well, we look at these components, we are seeing improvements based on the initiatives we have been undertaken.
The provision for bad debt expense was $10 $2 million in Q3 of 2023 versus $14 $1 million in Q3 of 2022.
Which was an improvement of $3 $9 million year over year.
As a percentage of gross lease billings 2023, Q3 was 32, 6% versus 36, 5% for the same quarter last year were 390 basis point improvement year over year, even with including some sales of delinquent receivables last year, which did not occur this year.
This improvement is a result of our underwriting tightening as well as continued enhancements to our fraud and credit risk capabilities and strategies.
We've recently upgraded our operational leadership team as well as adding new collection agencies to work on our past two portfolios.
We expect that this new leadership and capabilities will result in continued improvement in past due liquidations, which will provide future support the keeping this expense trending in a favorable way.
Depreciation and impairment of lease merchandise expense was $13 $1 million in Q3 of 2023 versus $18 $8 million in Q3 of 2022, 5% million dollars lower year over year.
As a percentage of gross lease spellings 2023, Q3 was 41, 8% versus 48, 6% for the same quarter last year were 680 basis point improvement year over year.
This is the results over the rollout of our retail product margin initiatives into the portfolio.
Which in a similar way to gross lease billing and fees the spread out over the life of the lease.
We are constantly evaluating the selection of products that we offer to better match, our customers' wants and needs.
Well as to continue to improve gross profit margin.
On what we sell.
Additionally, we are investing in our technology platform to add flexibility and scalability to this important initiative, which is already adding significant value to the company.
Marketing costs were $1 7 million in Q3 of 2023 versus $2 $4 million in Q3 of 2022 or $700000 lower year over year.
Importantly, total marketing spend was 30% lower year over year, while funding was only 11% lower year over year.
Youre seeing more efficiency in our marketing efforts in comparison to last year with the difference between year over year spend in origination volume.
And we're continuing to improve this efficiency by way of testing, new marketing partners or better targeting and personalization.
Adding new capabilities and generative AI content creation on our marketplace to increased traffic and conversion.
Rice testing on both our products as well as our lease costs to optimize revenue and risk.
Adding all of these components up our lease revenue less provision for loss depreciation of lease goods and marketing was $6 4 million for Q3 of 2023 versus $3 $4 million for the same quarter last year were $3 million better year over year.
The underlying underlying components of our lease business is at favorable levels. Our goal now is to increase revenue.
As I mentioned earlier lease funding levels in September and October were up year over year, which will if that trend continues eventually result in higher top line lease revenue.
We're also introducing new financing and payment option partners on a marketplace that will allow for increased revenue for retail product margin from customers that either do not convert with our lease pricing or customers that we decline the subsequent funding partner approves.
We expect little cannibalization on our lease origination as our partner payment offerings are controlled from a credit profile standpoint to minimize overlap.
On the enterprise and smaller partnership point of sale lease channel.
Our partner door count that had our leased product available increased approximately 15% from last quarter.
We expect that this will continue into Q4 of 2023 and into 2024 with new potential partners currently in different stages of discussion.
We are excited about this growth channel not only for the direct revenue that these partnerships provide.
The increased customers that may also take advantage of our marketplace offerings.
On our lending front, we originated $14 $8 million in Q3 through a revolution finance platform and zero point $1 million through our loan participation program.
This compares to $10 4 million in Q2 of last year.
Our loan participation program no originations through Revolution, which we acquired in Q4 of last year.
As a reminder, we issue consumer loans within approximately 100 storefronts consisting of own physical locations and virtual locations within Liberty tax stores using state lending licenses.
We're seeing incremental growth within revolution, with a 6% increase in originations from last quarter, and a 42% year over year increase in overall lending related fundings.
Similar to our lease operations, we've invested in leadership within the Revolution platform and expect growth to accelerate into Q4 of this year and into 2024.
As we invest in our leadership team, our technology capabilities, and our servicing and lease and loan distribution partners <unk>.
Spec to simultaneously achieve topline growth and favorable economics within the P&L.
To that end, we saw an increase in our bank participation portfolio collections due to our investments in operations and agency partnerships that I mentioned earlier, which has resulted in a $7 1 million positive net change in the fair value of loan receivables due to higher future expected cash flows from the portfolio.
As we continue with these investments in people strategy and technology I'm personally very excited about what our business can do.
With that let me turn the call back over to the operator for any questions.
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Sorry.
Our first question comes from the line of Scott Buck with HC Wainwright. Please proceed with your question.
Hi, Good morning, guys. Thanks for taking my questions.
First one on the enterprise.
Our rollouts can you remind us what the typical kind of cadence is for those relationships to mature I mean is it takes.
Six months or 12 months before you really start to see some momentum there.
Good morning, Scott.
I wish it was.
As simple as having a standard cadence for all of these enterprises we have.
A recent one that just fully rolled out to about 600 locations and.
It was a.
It was a pilot for.
Six months and then as we started a fuller rollout and then it was just paused for the for this summer and then take a little while so that entire process was probably a 15 months or so.
This most recent one that I mentioned.
On the call earlier was.
Probably it'll be five months from start to finish so it doesn't really have a fixed.
Fixed pattern I think the approach has been let's.
Look for opportunities, where we can.
Chief at the right acquisition cost.
Ah yes.
The sort of right type of growth you expend resources to focus on it.
And hope to continue to.
Add in the area of 500 to 2000 stores a year and it looks like we've done for the past couple of years, we've done a little bit better than that.
Great. That's helpful. And then the second one can you give us an update on the competitive environment anybody encroaching on your space are you seeing anybody Act you know generally more aggressively.
What we've seen actually is a pull back in a couple of our sectors as the bank partnership programs have become a little bit more difficult to sustain as more bank banks have Oh ended those programs we've seen some pulled.
Back there.
I think all of it is about choosing.
Right verticals, obviously, some are more contested than others, but no new entrants.
Great and then just last one from me if you could give us kind of an update on where we are in the fourth quarter versus what we've seen historically with the seasonal bump I guess in originations.
Sure I'll let.
John take this one yeah.
Hi, Lee.
Pretty pleased with what we're seeing.
Early you know I had mentioned earlier in my prepared remarks.
I know September had a positive.
Comp and this was both on our enterprise side as well as our marketplace.
And we're actually seeing those comps increase as we are getting closer and closer to the holiday period.
Our holiday period really accelerates.
From.
Black Friday into cyber Monday, and then peak.
Peaking probably mid December.
But if we compare the trend coming into the fastest period.
We are favorable to what we've seen in the past couple of years.
Great. That's helpful. I appreciate the added color guys. Thank you. Thank you again and congrats on the quarter.
Thanks.
Our next question comes from the line of Michael Diana with Maxim Group. Please proceed with your question.
Thank you Hey, Ross.
Good morning.
Actually I was going to ask about the same two topics.
Just to ask it a little different question. So on the on the 1000 store enterprise rollout.
Did I hear you correctly in saying that you think that should increase your lease volume by 25%.
Sure and well that the enterprise lease volume by 25%.
Hi.
Yes.
Okay.
Right.
I guess you just said you expect that program to be fully up and running in about five months right. So it should impact the holiday season, that's coming on here, but it it won't be fully rolled out is that right.
That's correct I would expect the.
As you can imagine that our retailer partners have a lot of priorities during the holiday season, it's not ways out rollout but.
It should be fully rolled out.
Before the end of the first quarter.
Okay.
And then as that relates to my next question, which is so you're obviously expecting.
Holiday quarter in the fourth quarter.
Do you expect the first quarter of 'twenty four.
Two.
Evidence the typical big downturn or because of everything you've been doing lately.
It may be less of a oh falloff.
Hey, this is John.
Yes.
Typically we'll see a drop from Q4 to Q1.
But.
If the trends continue as we're seeing them right now.
We're expecting a higher year over year Q1.
Yeah versus 2023.
But you'll always see that that seasonal downtick, if I roughly 40% of our origination volume.
From Q4 every every year. So obviously, it's a very important season, but the good thing about especially these enterprise.
<unk> rollouts that are that we're bringing online.
Those are not as seasonally dependent.
You look at a tire store.
That is a year round.
Sale for us so.
That should help us smooth out our overall lease origination volume.
Okay, great. Thank you very much.
Okay.
And we have reached the end of the question and answer session now I'll turn the call back over to management for closing remarks.
We appreciate everyone dialing in this morning.
Hi.
Thank the team for all their hard work over this past quarter and the results are generated and we look forward to a great holiday season, and catching up with you all to report our full year results shortly.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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