Q1 2024 Sezzle Inc Earnings Call
Good evening and welcome to the scheduled first quarter financial results Conference call.
All participants will be in listen only mode should you need any assistance. Please signal a conference specialist by Christmas stocking followed by Gerard.
After today's presentation there'll be an opportunity to ask questions.
Speaker Change: Can I ask a question Christa and one you touched on fine.
Joe Your question Christa and Jay.
He's not anticipate is being recorded.
I would now like to turn the conference over to China. You again. Please go ahead.
China: Thank you.
Charlie Yorkie: Good afternoon, everyone and welcome to <unk> 2024 first quarter earnings call. My name is Charlie Yorkie, I'm, the CEO and executive Chairman of shuttle.
Charlie Yorkie: I'm joined today by my co founder and President Paul Paradise, Our Chief Financial Officer, Karen Heartbeat.
Our head of Corp, Dev and I are the Brady.
China: In conjunction with this conference call, we filed our earnings announcement with the SEC and have posted it along with our earnings presentation on our Investor website on shuttle Dot com.
China: If you have not done so already please go to the Investor Relations section of our website.
China: There you'll find the press release and earnings presentation under quarterly earnings within the financial section.
Speaker Change: Now that we're all sorted let's get started.
Speaker Change: We've had a number of extraordinary quarters in our short history and I think you'll agree this quarter could be among the best thus far.
Speaker Change: Dive into the presentation, starting with the left side of slide three.
Speaker Change: Q1 turned out to be another strong quarter of topline growth as total income increased 35, 5% compared to the prior year's quarter.
Speaker Change: Net income for the quarter came in at $8 million.
Speaker Change: Which is larger than the $7 1 million and net income that we posted for all of 2023.
Speaker Change: Because that result puts us at nearly 50% of our guidance for the year you might guess that we're raising 2020 for guidance and you're correct I'll get to that in a moment.
Speaker Change: The $8 million and net income representing a 17% net income margin and resulted in a 31% return on equity for the quarter.
Speaker Change: Jan Besides the return on equity for the quarter it is not annualized.
Speaker Change: Our total subscriber count increased to 371000 at the end of the quarter.
Speaker Change: Which represents a net increase of 64000 subscribers during the quarter.
Speaker Change: Further we recorded $15 million and adjusted EBITDA compared to $8 3 million in the prior year.
Speaker Change: At a margin of 31, 9% for Q1.
Speaker Change: Consumer engagement remains high as evidenced by the top 10% of consumers transact in an average of 53 times per year.
Speaker Change: As alluded to earlier, we are raising our net income guidance for the first time for the first time, providing and for the first time, providing EPS guidance we.
Speaker Change: We are increasing our GAAP net income guidance for 2024 to 30 million from $20 million.
Speaker Change: And providing GAAP EPS guidance of $5 for 'twenty 'twenty four.
Speaker Change: On previous calls we have discussed the rule of 40 and how companies made differently defined profit margin in a range from adjusted EBITDA margin to net income margin.
Speaker Change: We're happy to say that we exceeded the rule of 40, however, you'd like to slice it.
Speaker Change: If you take the hardest measure of the rule of 40 and use revenue core growth and net income growth.
Speaker Change: Net income margin, we're north of 50% for the quarter. If you take our revenue and EBITDA margin were north of 67%.
Speaker Change: We also discussed our own goal of 2016, 20, which equates to beating a 20% revenue growth target of 60% gross margin goal of 20% net income margin goal.
Speaker Change: In the first quarter were getting closer to attaining that overall 2060 20 goal with a 35, 5% revenue growth of 55% gross margin and a 17% net income margin.
Speaker Change: Because of our recent run of success as we often get the questions from bankers analysts and investors.
Speaker Change: How are you all done such an amazing turnaround, what's the secret sauce.
Speaker Change: Our success did not happen overnight, nor was it easy but it occurred your creativity dedication and hard work from each employee at subtle.
Speaker Change: But at our core ever.
Speaker Change: Every decision we consider.
Speaker Change: We make we consider our guiding principles as laid out on slide four.
Speaker Change: Starting with positively affecting profitability.
Speaker Change: We used to chase growth for growth's sake.
Speaker Change: We no longer do that which is obvious from our result.
Speaker Change: Keep part of profitability is increasing the lifetime value of our consumer.
Speaker Change: The launch of our premium anywhere subscription products is a great example of us focusing on increasing LTV.
Speaker Change: While we create products that our consumers truly luck.
Speaker Change: Well it may not reflected in our absolute numbers, we are highly focused on acquiring new users.
Speaker Change: But first we had to focus on profitability.
Speaker Change: Over the next six to 18 months, we have several items focused on driving user acquisition from marketing campaigns to product offerings.
Speaker Change: Last but not least from a stakeholder perspective.
Speaker Change: Driving profit and bottom line results are important but we also recognize that we must be good stewards we.
Speaker Change: We are proud to be the only buying up here that are companies that are certified B Corp.
Speaker Change: Just spouses being good stewards for the next generation that comes out for US we expect to renew our B Corp status. This summer.
Speaker Change: As mentioned earlier, we have surpassed 371000 subscribers across premium than anywhere.
Speaker Change: As shown on slide five.
Speaker Change: The amount of engagement and positive feedback has been extraordinary.
Speaker Change: Tumors have really embraced the flexibility of anywhere with about 32% of the orders being generated from virtual card caps at point of sale retailers. These are in store transactions.
Speaker Change: Subscribers are also on average, making six more purchases a quarter in non subscribers.
Speaker Change: Which is a key part of us increasing consumer lifetime value.
Speaker Change: Further our anywhere members are shopping a broader rare array of locations and are making everyday purchasing at general merchandise retailers grocery stores and restaurants to meet their discretionary needs.
Speaker Change: To borrow a quote from a recent article in payments.
Speaker Change: The data seems to suggest that buy now pay later as simply a modern adaptation of credit and the evolving landscape of consumer finance.
Speaker Change: Again going back to our mission.
Speaker Change: Through these subscription services, we continue to financially empower the next generation of their journey through life.
Speaker Change: And our NPS scores continue to track well for anywhere in premium.
Speaker Change: We do see customer NPS outperformance in anywhere relative to premium and we attribute this simply to the greater flexibility of anywhere as a consumer product.
Speaker Change: Okay.
Speaker Change: We are excited about the path forward and aren't resting on our laurels.
Speaker Change: As shown on slide six we recently launched payments rates for consumers.
Speaker Change: We essentially game of final payments for consumers by rewarding good behaviour, which marries well with our commitment to enhance the consumer experience and foster financial responsibility.
Speaker Change: It's too early to provide any color on the progress as we have just launched the product in the last couple of weeks.
Speaker Change: But we will surely be watching closely at the impact of strikes.
Speaker Change: We think that the new cheering system, and gamification and streets, well enhance the consumer experience and help us with consumer retention.
Speaker Change: It will start to have natural segmentation occur within our consumer base through the tiers attained by our their payment performance.
Speaker Change: We're also making great product progress with our market place expansion into direct product listings.
Speaker Change: While there is still a work in progress we are seeing it drive more engagement per square inch of mobile real estate through clicks in App sessions, which ultimately lead to better financial results and better retention of consumers.
Speaker Change: Similar to payments strikes many of the improvements are very recent so it's too early to share any quantifiable results.
Speaker Change: Our bank partnership continues to progress and we believe we're going to have a very good relationship with our future partner.
Speaker Change: We are fully engaged across the company on completing the final steps in our prelaunch engagements.
Speaker Change: The key initial benefit the bank partnership will be the banking as a service relationship which will allow us to unify our product construct behind the national standardization versus the state by state operations, we worked through today.
Speaker Change: The state by state approach has proven to limit our profitability due to some states very restrictive lending laws. As an example, some states don't allow any late payment fees.
Speaker Change: Others restrict the amounts and timings of PS.
Speaker Change: These numerous and diverse laws have made running our business a bit more complicated while also limiting our products' profitability.
Speaker Change: Through the bank partnership will have a national banking charter behind our product that.
Speaker Change: That will help us pull back the restrictions increasing the profitability of our core products.
Speaker Change: The secondary benefit of the banking partnership is that it will allow us to launch additional products that we believe will be a key to future user acquisition and customer lifetime value expansion.
Speaker Change: Yeah.
Speaker Change: The future benefits of this banking partnership are not included in our updated guidance.
Speaker Change: And we're not able to share the details unexpected impacts as we follow a conservative.
Speaker Change: Survey of approach it's projects like this we.
Speaker Change: We like to actualize the benefits before we pass the results in your internal budgets and guidance.
Speaker Change: We're also not guiding on the timing of this going live is half of the work is not in our hands.
Speaker Change: Slide seven provides a sample of some of our marketing efforts.
Speaker Change: In case, you're new to settle in the early stages, our marketing efforts were completely targeted towards the merchant.
Speaker Change: And while the majority of our spending is still targeted toward merchants, we are expanding our efforts to the consumer as showed on slide seven.
Speaker Change: Our marketing team is to create a bunch and I'm looking forward to what they come up with next.
Speaker Change: By the way all of these efforts are evaluated based on CAC to LTV ratios.
Speaker Change: Our positive results and momentum are further reflected in some of the key nonfinancial metrics then as shown on slide eight.
Speaker Change: It has been great to see us growing subscribers increasingly repeat usage.
Speaker Change: An improving consumer purchase activity in terms of frequency and total order count.
Speaker Change: As further evidence of the success of several anywhere which was launched in June of 2023 shoppers have been using it everywhere in the first quarter shoppers use us at over 149000 merchants compared to just 22000 in the prior year.
Speaker Change: It is great to see says it'll become a part of People's Daily lives.
Speaker Change: Year over year, we experienced a decline in active consumers, but sequentially. The number has been flat since August.
Speaker Change: As noted last quarter, we believe it has bottomed out and we look forward to seeing active consumer pick up in the second half of this year.
Speaker Change: With that I'm happy to turn the call over to our CFO, Karen Harkey, who will go over the quarterly financial results in greater detail.
Karen M. Hartje: Thank you Charlie and Hello to all.
Karen M. Hartje: On to slide nine as referenced several times already we had a very good start to 'twenty 'twenty four is at risk.
Karen M. Hartje: Liked it in our year over year results.
Karen M. Hartje: Total income increased 35, 5% year over year led by a 33% increase in U N that net.
Karen M. Hartje: Net income came in at 8 million for the quarter compared to 1.7 million the previous year.
Karen M. Hartje: Mt was driven by a combination of driving topline growth through that script and subscription sign ups, while also lowering operating expenses.
Karen M. Hartje: Those actions are further reflected in our EBITDA margin at 31, 9% and our non transaction related costs declining to 34, 5% of total income compared to 55, 7% in the prior year.
Karen M. Hartje: As shown in slide 10, we typically see a drop off in U M. S from fourth quarter to first quarter seasonality the.
Karen M. Hartje: The seasonal drop off in U M. As was consistent with what we have experienced in the last couple of years. However.
Karen M. Hartje: However, I would like to note that we did not see that same drop off in total income, which only fell three 9% from fourth quarter to first quarter as we had a pickup in subscriptions during the quarter.
Karen M. Hartje: The combination of U M. S N subscription growth drove total income higher year over year by 35.5%.
Karen M. Hartje: And slide 11 transaction expense, which is primarily aimed at processing costs rose to 2.4% of U M. S. Although we did see an increase partially attributable to our average order values declining during the quarter compared to the prior year. We believe we can lower those factories.
Karen M. Hartje: And historical levels as a percentage of beyond that.
Karen M. Hartje: Seasonally first quarter is the healthier quarter, if our provision because of the tax refund season, we do expect the provision for credit losses as a percentage of your illness to ride over the remainder of the year as it did in 2023.
Karen M. Hartje: However, we expect it to remain within a reasonable level as we continue to evaluate the balance of growth versus losses.
Karen M. Hartje: Led by the increase in provision year over year, our transaction related costs as shown on slide 12 rose to 44, 7% of total income.
Karen M. Hartje: Nonetheless as reflected on slide 13, we were well above our 2024 guidance of total income less transaction related costs of 50%.
Karen M. Hartje: In case, you haven't figured it out by now we are not all about growth at any cost on slide 14, you can also see that we are hyper focused on expenses.
Karen M. Hartje: Not only were we able to grow the top line by over 30%, but we were able to lower non transaction related operating costs on an absolute basis by $3 $1 million, representing over a 15% decline year over year.
Karen M. Hartje: The line graph on the right side of Slide 14 reflects how the combination of our unit economics and expense management are driving strong bottom line performance.
Karen M. Hartje: Speaking of Bottomline performance, turning to slide 15. The evidence is in the results 8 million of net income and 15 million and adjusted EBITDA.
Karen M. Hartje: In 'twenty 'twenty four we have also improved our liquidity position and solidified our capacity for further growth as evidenced by our new credit facility highlighted on slide 16.
Karen M. Hartje: Subsequent to quarter end, we closed on a new 150 million facility with best in.
Karen M. Hartje: A longtime lending partner for Sasol.
Karen M. Hartje: The new facility increases the size of our credit facility and significantly lowers the interest rate cost from silver plus 11.5% just over plus 6.75%.
Karen M. Hartje: We expect a significantly reduced interest costs going forward as the hill facility has a lower borrowing rates and a lower minimum utilization requirement.
Karen M. Hartje: All paths lead us to continuing to improve and strengthen our balance sheet slide.
Karen M. Hartje: Slide 17 reflects the positive impact our bottom line performance has had as stockholders equity stands at $29 6 million and we have built and unrestricted cash position of almost 78 million compared to only 59 million at this time last year.
Karen M. Hartje: At this point I imagine everyone has cheated and looked ahead to our outlook on slide 18, I know I would have by now.
Karen M. Hartje: We are happy to update previous guidance and provide some additional guidance as well.
Karen M. Hartje: We now anticipate our total income growth rate for 'twenty 'twenty four will be approximately 25%, resulting in total income at 200 million compared with our previous guidance at 20%. We still expect total income less transaction related costs should come in around 50 per se.
Karen M. Hartje: For 'twenty 'twenty four.
Karen M. Hartje: Meanwhile, we are up in our GAAP net income guidance of 30 million from 20 million, we expect our new GAAP net income guidance to result in GAAP EPS of approximately $5.
Karen M. Hartje: At the bottom of slide 18, we've added a valuation metrics based on the ratio of our market cap to our 'twenty 'twenty four earnings guidance and compared it to the same metric using the consensus for other popular indices I'm sure you get the point without us, stating that we are not happy with our valuation as we are trading.
Karen M. Hartje: At less than half of the valuation when compared to these indices.
Karen M. Hartje: As we were hyper focused on being profitable we are hyper focused on enhancing shareholder value. In addition to the $5 million stock repurchase plan, we announced in December 2023 we will evaluate other capital return options for shareholders, including but not limited to.
Karen M. Hartje: Dividends incremental share repurchases or a combination of both.
Speaker Change: With that I would like to turn the call over to the operator as we are happy to take your questions. Operator will you. Please open the lines for Q&A.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: To ask a question you might Christa and one on your Touchtone phone.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the case.
Speaker Change: Sure Joe Your question. Please press Star then two.
Speaker Change: Yeah.
Nico: Your first question comes from Nico such Oaky from RBC.
Nico: Please go ahead.
Nico Sacchetti: Hi, everyone. How are you doing.
Nico Sacchetti: Good How're you doing.
Nico: Outstanding Reading through your your earnings report here.
Nico: I thought last report was good. This was you guys knocked the cover off the ball. So just wanted to say congratulations.
Nico: And thank you for breaking out the earnings per share guidance.
Nico: <unk>.
Nico: I think it really helps to clarify and expose how cheap you're your stock is here. So I think that's a great addition that slide.
Nico: Can you give us any information on the stock buyback as far as average price per share that was paid.
Karen M. Hartje: Karen do you have that detail around anymore.
Karen: At this point, we have a repurchase the mm three years does it mean.
Karen: <unk> 5 million worth of stock Yep.
Karen: I was just curious sort of the five you bought back three five I was just curious if you.
Karen: And what what you were paying per share on average.
Speaker Change: So I think you'll see that in the 10-Q, okay I'm not sure the detail will be in there.
Speaker Change: Alright very good.
Speaker Change: <unk>.
Speaker Change: As far as and I ask the question, but maybe just to clarify for anybody else listening you mentioned warrants on the call I'm. Just curious is there some something outstanding that.
Speaker Change: If exercised would be significantly diluted.
Speaker Change: I'll take that.
Speaker Change: Yeah go ahead.
Speaker Change: Yeah, we are.
Speaker Change: We have about a 54000 and a warrant their already reflected and that diluted share count and that's less than 1%. So now it's not significant.
Speaker Change: A follow up to that is I'm looking through the the outstanding shares and I see a jump of almost 10% and the dilutive number from the.
Speaker Change: The year over year reported.
Speaker Change: Five point, we'll call it 555 to almost six.
Speaker Change: Can you give can you educate me on what happened with with the with the increase in diluted shares outstanding.
Speaker Change: Fair enough.
Speaker Change: Well it includes both our warrants and employee option.
Speaker Change: And there are more options in the money compared to a year and at this point okay great.
Speaker Change: And our share price.
Speaker Change: So the so your $5 a share earnings guidance is based off of we'll call. It roughly $30 million of net income divided by almost 6 million shares is that the math that you're doing.
Speaker Change: Exactly yeah yeah.
Speaker Change: Okay.
Speaker Change: Let's see.
Speaker Change: You kind of covered it but I mean, you look at it and it's almost shocking to see how profitable you are especially when you get a real life comparison with a firm coming out this morning, and showing how much of their losing on operating income.
Speaker Change:
Speaker Change: You touched on it but I mean my question would be just how are you able to be so profitable when other players in the exact same space and maybe it's not an apples to apples theyre doing different things different different revenue streams and.
Speaker Change: I just.
Speaker Change: I wish there was a more eloquent way to ask you know can you expand on just how you you've been able to.
Speaker Change: To create so much so.
Speaker Change: So much net income off of this revenue base, where others are struggling to turn a profitable penny.
Speaker Change: I think each company probably has a different strategy of how to approach things depending on their cash balances et cetera.
Speaker Change: Our view, though it was you know.
Speaker Change: We always kind of talked down to the basics of the company and I'm like you know our view is you've got a lemonade stand, let's make sure that we've got a great lemonade and we've got some great profitability on eliminated before we start to sell it to the masses and really expand operations and so we spent the last couple of years doing that making sure that we've got a great lemonade, we've got some great profitability.
Speaker Change: On it and now we want to really hit the gas where I think some other companies view it as lets just keep it in the gas and building the airplane, while we go in.
Speaker Change: We just don't believe that's the right approach, we think the safer approach is making sure that you've got everything in order before you start to really expand it.
Speaker Change: Is there an opportunity now for you to hit the gas without sacrificing the profitability metrics that you've built here.
Speaker Change: Yeah, absolutely I mean, our view is that we keep on working on lifetime value increasing lifetime value customer.
Speaker Change: And then what that does for US is we have this symbiotic symbiotic relationship with merchants, where we're helping them with their with their sales on their sites were also driving traffic to their sites. So we've got this fantastic symbiotic relationship with merchants.
Speaker Change: And what we can do though is be more aggressive with them as the consumer lifetime values of the subtle customer continue to increase post that purchase.
Speaker Change: So our belief is that we can continue to have strong growth, while maintaining strong profitability goals as a company.
Speaker Change: I mean, that's maybe a decent segue into what happened around the Walmart situation, where it looks like they're trying to do this in house and.
Speaker Change: What you know the the follow up.
Speaker Change: Question would be do you have you know a concentrated relationship that would be a material loss if.
Speaker Change: If this became commonplace and then you know maybe is it do you foresee this being something that.
Speaker Change: You know large retailers at least we'll try to just.
Speaker Change: Do this themselves and then.
Speaker Change: A second follow up would be is that a potential acquisition down the road, where someone would would look at buying you do incorporate you into their existing existing business.
Speaker Change: Personally I don't think so Nicole I think that this walmart situations quite unique and we're not you know.
Speaker Change: Doug will not highly concerned because we don't have a direct relationship with Walmart.
Speaker Change: I think this is going to be.
Speaker Change: Few and far between.
Speaker Change: I always talk about internally in the company always talk about private label credit card.
Speaker Change: Precursors, what we're doing with merchant relationships et cetera, and in that private label World you find that.
Speaker Change: Almost no retailers do their own private labels.
Speaker Change: They worked through banking partnerships sure.
Speaker Change: And I think that buying up here then it would kind of fall that Sam.
Speaker Change: Saint Pat's, so I think this will be unique.
Speaker Change: Okay, and then on the M&A you know you just never know on M&A, we basically build the business to build a great business.
Speaker Change: Right.
Speaker Change: Folks on that.
Speaker Change: Can you educate me on this Canadian opportunity same competitors that are here.
Speaker Change: Is that something that I mean, it was it was definitely a positive press release can you can you give any any additional information on on the opportunity there.
Speaker Change: Yeah.
Speaker Change: Actually recommend investors take a look at the App stores in Canada and look at the accounts of reviews.
Speaker Change: The competitors, it's first of all not all the competitors in the United States or a president in Canada, Okay, and what we tend to find is our competitors have degradation offerings in Canada because of a lack of focus in that market, where we really fight for parity in our product offering there we view it as an important part of our overall business.
Speaker Change: So I think that we have.
Speaker Change: We index higher in Canada in terms of success in size versus the U S. Okay.
Speaker Change: Very good.
Speaker Change: Last question is it looks like you're sitting on a really solid balance sheet. Right. Now is is is in terms of the cash.
Speaker Change: You know are there are there investments that can be made to to to help us with what the growth story is is this a inappropriate number to be sitting on it seems like you've been generating in adding to the cash position I'm just curious what the you know what what the end users are what the end game is.
Speaker Change: We'll never make a hard rule about anything I think our view is keep on piling on cash with profitability.
Speaker Change: And then if we find an opportunity where the ROI makes sense we.
Speaker Change: We will take a deep look at it.
Speaker Change: Just like we do with our marketing initiatives, we're always looking at our CAC to LTV ratios does this make sense.
Speaker Change: We tend to find is that the merchant relationship is still by far and away the best relationship for us.
Speaker Change: It makes sense because of this the symbiosis of the relationship.
Speaker Change: So we look at.
Speaker Change: Return and I think we've looked at return with our cash if we can find some return for it.
Speaker Change: We'll definitely take a look.
Speaker Change: Okay.
Speaker Change: Well, yeah, thanks for taking my questions Congrats.
Speaker Change: Congrats again on the quarter in any way I look at this and try to work the numbers.
Speaker Change: I mean, I'm getting close to a billion dollar valuation you start overlaying.
Speaker Change: You know, even conservative metrics and so I really look forward to continuing to own the company here and.
Speaker Change: I'll jump back in the queue here.
Speaker Change: Thanks, Niko Yep.
Speaker Change: Once again, if you wish to ask a question. Please press star one on your telephone keypad, we will now pause momentarily any further questions to Manchester.
Speaker Change: This concludes our question and answer session I would now let's turn the conference back to Mr. Joachim for closing remarks.
Joachim: Thank you.
Joachim: In closing I'd like to thank the subtle team again, we continued all roll in the same direction, which is leading to these great results.
Speaker Change: This quarter I'd also like to send a special shout out to the product and engineering teams.
Joachim: As much as as much of what we're seeing in these numbers is due to the amazing innovative work created by those teams over the last two or so years, great job for you all.
Speaker Change: And in honor of delayed Charlie Munger I'd also like to thank the true investors out there that follow us sit on your <expletive> method to investing with subtle and they've invested and held our share through at all because of their belief in what we're doing as a company. Please.
Speaker Change: Please know that we keep you in mind as we continue to innovate and deliver.
Speaker Change: Thank you all and have a great rest of your day.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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