Katapult Holdings, Inc.

Thank you for standing by and welcome to the Catapult Q2 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, please press star one on your telephone keypad. If you'd like to withdraw your question, press star one. As a reminder, today's call is being recorded. I will now hand today's call over to Bill Wright. Please go ahead, sir.

Thank you and good morning. Welcome to the Catapult second quarter 2022 earnings results conference call. With me today are Orlando Zayas, Chief Executive Officer, Carissa Cupidow, Chief Financial Officer, and Derek Medlin, Chief Operating Officer. We issued our earnings release and corresponding investor presentation this morning, and we will be referencing these during the call. Both can be found on our investment relations section of our website. We will all be available for Q&A following today's prepared remarks. Before we begin, I would like to remind everyone this call will contain forward-looking statements regarding future events and our financial performance, including statements regarding the anticipated occurrence and timing of prime lending tightening and impact on our results of operations, our growth opportunity, the timing and impact of our growth initiatives on our future financial performance, the impact of our new executive hires and brand strategy. These should be considered in conjunction with the cautionary statements contained in our earnings release and the company's most recent periodic SEC reports, including our form 10-Q for the quarter ended March 31st, 2022, and the subsequent periodic and current reports we file 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. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events, or otherwise. During today's discussion of our financial performance, we will provide certain financial information that constitutes non-GAAP financial measures under SEC rule. These include measures such as adjusted gross profit, adjusted EBITDA, and adjusted net income. These non-GAAP financial measures should not be considered replacements for and should be read together with our GAAP results. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release, which is available on the investor relations section of our websites. This call is being recorded, and a webcast will be available for replay on the investor relations section of our website. I will now turn the call over to Orlando.

Thanks, Bill. Good morning, everyone, and thank you for joining us. On today's call, we will review our financial results for the second quarter of 2022 and provide an update on progress we have made on our strategic growth initiatives. The challenging macro environment for both our retailers and our consumers continued into Q2 2022, including inflationary pressures and shifts in spending away from durable goods, which impacted our gross originations, revenue, and lease portfolio performance for the quarter. Despite facing these near-term macro headwinds, we are confident in our long-term ability to weather these challenges and remain focused on capturing new volume opportunities from a very large addressable market in order to create value for our shareholders. Turning to slide four, some of the key highlights from the second quarter include, we added 42 merchant partners. Two, our satisfaction metrics remain strong. Our net promoter score was 60 as of June 30th, 2022, and our repeat customers made up 52% of our Q2 2022 originations. Three, We hired the final open strategic leadership position that we had laid out in our growth plan, our chief revenue officer, Reid Burke. Reid brings with him a wealth of experience driving growth at companies like Sezzle and PayPal. Four, we launched a new brand platform that we believe differentiates ourselves in the market and is centered around the core philosophy that drives our company, seeing the good in people is good for business. As part of this new brand platform, our brand logo and colors were refreshed, which you'll see in our investor presentation. Five, we continue to be focused on identifying core efficiencies and cost savings opportunities. I will now turn the call over to Carissa, our CFO, who will provide more details on our financial performance. Carissa?

Thank you, Orlando. As detailed on slide five, Q2 results reflect a difficult macro environment for both our retailers and consumers, which resulted in decreased originations and weighed on our key revenue drivers. Gross originations for the second quarter of 2022 were down 28% year-over-year. Rampant inflation, widespread weakness in durable goods spend, along with our continued tighter underwriting decisioning drove the decline in gross originations year-over-year. Total revenue was 53 million, which was down 32% year over year. Had ASC 842 been effect for Q2 of 2021, total revenue would be down 24%. Please see slide six for more details. Gross profit was down 13.3 million. Adjusted gross profit, which is detailed on slide 12, is lower by 5.4 million year over year. The decline is attributable to lower lease margins. Our net loss for the second quarter increased 1.6 million and adjusted EBITDA decreased by 9.2 million. Turning to slide seven, overall operating expenses were down 14.1 million year over year, or 46%. Excluding bad debt expense, which we no longer record due to the adoption of ASD 842, operating expenses were down 6.1 million. This significant reduction in operating expense is mainly due to lower stock comp and bonus expense that runs through our compensation costs. As a reminder, in the second quarter of 2021, We incurred approximately $12 million of stock comp and bonus expense in conjunction with the closing of the SPAC merger. Removing this merger-related stock comp and bonus expense impact, compensation costs were up approximately $3.7 million year-over-year, which is due to a combination of increased payroll costs from the investment growth hires that we have made, as well as $1.9 million in stock comp expense recognized during the quarter. We are focused on driving increased efficiencies throughout the organization and are continuously identifying cost savings opportunities. One example of a cost savings initiative we executed in Q2 was our DNO insurance renewal that occurred in June. We were able to reduce our annual premium by $1.8 million while improving our terms and coverage. This savings will be realized over the next four quarters. Looking forward, we will continue to focus on opportunities to lower operating expenses while maintaining the resources needed to drive future growth. Turning to slide eight, impairment charges related to property health for lease as a percentage of gross originations was 9.2% in Q2 of 22, which reflects the continued challenging macroeconomic conditions our customers are facing, specifically related to the current inflationary environment. High inflation, especially on gas, food, and housing costs, significantly impacts our consumer base and has pressured lease performance. As we discussed last quarter, we anticipated this metric returning to pre-COVID levels and we have continued to tighten our underwriting model throughout the first half of 2022. As we move forward through this challenging environment, we will continue to make adjustments as deemed necessary to our underwriting model. We continue to anticipate that credit will inevitably tighten across the credit spectrum, including prime lenders, and as a result, we believe new higher income customers will seek out our offering. While we have not yet seen an impact in the prime lenders tightening above us, we are seeing early signals that lead us to believe that the tightening will eventually occur. These signals include the rapid reduction of consumer cash reserves across the nation as wages are not keeping pace with inflation and higher credit utilization. Should this prime tightening happen as we expect, we believe this will positively impact both our lease portfolio performance and our origination volume. I will now turn the call back over to Orlando to discuss our strategic investments.

Thanks, Carissa. Slide 9 details the strategic investments we are making now to enable us to capture a large growth opportunity ahead. Looking at the expansion category of this slide, we continue to execute on the initiatives that we committed to as part of our strategic growth plan. To date in 2022, we have increased the breadth and depth of our leadership team, adding key strategic positions such as Chief Marketing Officer, Chief People Officer, and VP of Strategy. Our final strategic hire that occurred in July was our Chief Revenue Officer. We are thrilled to have been able to attract Reed Burke to join our company as Chief Revenue Officer. Reed was most recently at Sezzle, where he built and led the enterprise sales team. Under his leadership, Sezzle was able to win large merchant accounts, including Target and Bass Pro Shops. We are excited to see what he'll be able to accomplish at Catapult. We anticipate that Reed, as well as the other strategic leaders we have hired this year, will be pivotal to driving our growth for years to come. Next on the list is optimizing our sales process for merchant and partnerships in progress. We are excited by the new structure, process, and methods that our VP of sales, Marina Ruiz, who started at the beginning of 2022, has implemented in a short tenure here. This new process resulted in 42 new merchants this quarter, the highest quarterly total in the company's history. Moving down the list to our marketing and brand initiatives, we launched our new Catapult brand platform last month. We believe that this is an important milestone for our company as we have aligned our brand to our core mission, humanizing the way underserved consumers get the things they need with payment solutions based on fairness, transparency, and dignity. Our new brand platform aligns our brand to how we treat our consumers as we don't charge late fees or repossess their leased goods. We believe this new brand platform and related marketing initiatives surrounding it gives us further differentiation in the industry. We anticipate it will be a powerful tool in attracting new merchants and winning large enterprise accounts. Looking to the remainder of the year, we are currently in beta testing stage for several new exciting product enhancements and technical capabilities that we expect to launch in the second half of the year. In addition, we are also working on enhanced risk modeling and data analytics that we believe will improve our approval and conversion rates and drive incremental originations and sales for our merchant partners. More to come on these initiatives in future earnings calls. In summary, our Q2 financial results reflect continued challenging macro trends that persisted throughout the quarter. Our approach to addressing these headwinds is centered around executing on the things that we can control. This includes continuing to execute on our strategic growth plan, onboard new merchants, frequently manage our lease portfolio, and identify operational efficiencies and cost savings opportunities. We believe the ongoing pressured macroeconomic conditions over the near term do not limit our ability to thoughtfully grow our company over the longer term. As we look ahead at the second half of 2022, we remain confident that our company is well positioned to take advantage of the positive long-term trends in digital commerce and alternative payment solutions. With that, I will now take questions.

Thank you. If you'd like to ask a question, press star 1 on your telephone keypad. If you'd like to withdraw your question, press star 1.

We'll pause for your first question. Your first question is from the line of Josh Siegler.

Yes. Hi. Good morning. Thanks for taking my question. Something I noticed was that new merchant partners increased sequentially. So can you walk us through some of the drivers behind this growth and perhaps the productivity of your growing sales force?

Sure. Hi, Josh. Thanks for the question, Orlando. So, you know, we hired a new VP of sales recently. who runs the SMB group, Marina Ruiz, starting in January. And he came from a very high energy, very specific flywheel of bringing on new retailers at Shopkeep. And so he's basically building that now. And so we are seeing greater adoption from the small, medium-sized We're seeing the leads increasing. And then with our repositioning, we've been getting out there from a B2B perspective to get our name out there and what our mission is all about. And I think that has helped drive some of the merchant ads that we have now and really creating this flywheel going forward. We also have a few that are in integration. that are actually a little bit larger than the small medium size, which we will be announcing pretty soon. One example I want to give you is we have one merchant that was a competitive win that just finished their integration on the waterfall with Affirm. And they're an e-commerce furniture store called One Stop Bedroom. They came to us because of our technology and ease of use and the Affirm waterfall. And we're excited about retailers like that that we're drawing in because they're the types of retailers that see e-commerce as the future, and they're growing their business, and we're helping them grow along with them.

Great. Thank you very much, Orlando. I appreciate the color there. I'm also curious to hear a little more about your end customer. Notably, Catapults continued to tighten underwriting, but most prime players in the space have yet to take similar actions. Are you seeing the current macro environment disproportionately impact subprime consumers compared to more prime consumers? Or is this just simply a matter of patience and waiting for the prime players to start tightening? Thank you.

Hi, Josh. This is Carissa. Good question. Yeah, I mean, at this point, we are seeing that our consumer, our end consumer, is the one being impacted most by inflation, higher gas prices, grocery prices. So we're seeing them get harder. Right now, I do think we are starting to see early signals, which you mentioned in the remarks that we had before, that there are certain signals that we're starting to see from the prime and credit environment overall that are giving us a little bit of hope and anticipation that the prime lenders will tighten above us. We have not seen that yet, but I think once that happens, we will start seeing a better quality consumer coming to us in terms of their credit and could also help with our gross origination volume as well as our lease portfolio performance.

Thank you very much, Theresa.

Sure. As a reminder to ask a question, press star 1 on your telephone keypad. Your next question is from the line of Anthony Ducamba.

Good morning. Thanks for taking my question. So I guess my question, you mentioned the 42 new merchants that you picked up in the second quarter, and that was an all-time record. Could you just give us some color around those merchants, just in terms of size of the merchants and or also verticals that those merchants are in? Thanks.

Hi, Anthony. This is Derek Medlin. Thanks for the question and for joining today. So just like Orlando mentioned, we are seeing the flywheel of our SMB business being the most consistent and improving in the productivity of that organization led by Merino. And so most of those are in that SMB space, and we are seeing categories continue to expand outside of appliances, furniture, and auto, those being our main areas. And those are areas that we focus in because those are the essential items that everyone needs. And during a macroeconomic picture like this, those are areas that we tend to focus on. Like Orlando mentioned, we do have some other activity that we're excited about, not ready to announce today, but we are seeing in general that as there has been constraint on consumer spending and on retail, that our sales productivity, both our message, our offering, and how we can help drive growth for retailers is really resonating. And so we expect this productivity to continue to improve.

Got it. And then just as a quick follow-up, I guess we'd love to get an update on Wayfair. They reported results recently, and their sales weren't down as much as your GMB was, which would imply that you might have lost some market share, given the fact that they account for two-thirds of your GMB. So I just wanted to see if we could get some more color there. Thank you.

Yeah, I'll take that one. This is Carissa. In terms of the Wayfair numbers, yes, their sales were down less than our sales, but that's not contemplating the underwriting tightening. So we have obviously across the board managed our portfolio and have been underwriting much tighter than before. than we did a year ago. So part of the reason we're seeing some of that decline or outsized decline in year-over-year originations versus Wayfair sales is really intentional because we're trying to manage our portfolio as prudently as possible. So that's really the delta between their sales decline and ours.

That's helpful. Thank you. Sure.

At this time, there are no further questions. I will now hand today's call back over to Orlando Zayas, any closing remarks?

Great. Thank you, Tamika. Thank you all for attending today's earnings call. While we face difficult macroeconomic times now and ahead, we are confident that the team and technology we have built will allow us to gain market share through the rest of this year and into 2023. I appreciate your time today, and thanks again.

This concludes today's call. Thank you for joining. You may now disconnect your lines.