Katapult Holdings, Inc.

Greetings and welcome to the Catapult Holdings fourth quarter 2023 earnings call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Cole, Vice President of Investor Relations. Thank you, Jennifer. You may begin.

Thank you, and welcome to Catapult's fourth quarter 2023 conference call. On the call with me today are Orlando Zayas, Chief Executive Officer, Nancy Walsh, Chief Financial Officer, and Derek Medlin, Chief Operating Officer. For your reference, we have posted materials from today's call on the Investor Relations section of the Catapult website which can be found at ir.catapultfoldings.com. I would like to remind everyone that this call will contain forward-looking statements based on our current assumptions, expectations, and beliefs, which are subject to significant risks and uncertainties, and which include our future financial performance and financial results for the quarter and year, our relationships with merchants, growth from new partnerships, and our ability to acquire and retain existing customers and use of generative AI to optimize our processes. These forward-looking statements should be considered in conjunction with cautionary statements contained in the earnings release and on Form 10-K for the year ended December 31, 2023 that we intend to file in the coming days, as well 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 today's discussion, the company will provide certain financial information that 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. A 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. Finally, all comparisons are year-over-year unless stated otherwise. With that, I will turn the call over to Orlando.

Thank you, Jennifer, and thank you to everyone joining us this morning. We're excited to discuss our fourth quarter performance, which greatly exceeded our top line expectations. We achieved gross originations of $67.5 million, representing growth of 13% year over year. Revenue of $56.7 million, which represented 16% growth and just below break-even adjusted EBITDA. Not only did we record our second highest quarter for gross originations volume ever, we also delivered double-digit revenue growth and positive adjusted EBITDA that improved by $4.9 million year over year. Today, my comments will focus on the drivers of our outperformance during the fourth quarter, progress on our merchant and customer strategies, and a brief update on our tech position, and finally, I'll give you a brief overview of our top focus areas for 2024 and the initiatives we intend to prioritize to drive growth this year. I'll then turn the call over to Nancy, who will provide you with more insights on our fourth quarter financial performance, our outlook for performance in the fourth quarter and full year 2024, and what we're seeing in the macro environment and our competitive landscape so far this year. Before I jump into Q4 performance, I want to take a quick step back and reflect on the very strong year we've had. First, we delivered strong gross originations and revenue growth during the period in which most of our competitors saw their business contract. This underscores our belief that we are not only offering the right product to the market, but we are offering a highly differentiated for both merchants and consumers. Second, we changed the trajectory of our path forward by significantly enhancing catapult pay during 2023. Catapult pay accounted for approximately 19% of our total gross originations in 2023, and we are very excited about the future of this game-changing application. Finally, we accomplished all this within the rigor of our disciplined expense strategy, which allows us to improve adjusted EBITDA substantially as we grew the top line. We are proud of the strong year we had and of our future potential, neither of which would be possible without the hard work of our Catapult team. I am so grateful for their contributions, and on behalf of the entire management team, I want to thank them for their dedication to our success. With that backdrop, let's talk about our strong performance during the quarter. As we entered the fourth quarter, we believed the uncertain macro environment could have an impact on our core non-prime consumer. While inflation had come down, student loan repayments had resumed, savings rates were low, and credit card balances were high, creating an uncertain macro environment. Despite this, we saw strong and steady growth in gross originations during the fourth quarter and, importantly, gross originations volume growth was achieved during the year in which our dynamic underwriting model, risks, and controls led to an approval rate that was more than 400 basis points below our 2022 approval rate. This strength was driven by originations coming from our direct integrations as well as catapult pay. Within our direct channel, we believe we benefited from merchant advertising and discounting, which we leveraged in our own marketing campaigns, driving better than expected increase in demand. This strength extended across our core retail categories, including automotive, electronics, furniture, and tires. In addition, we benefited from performance of new direct merchants such as Grown Brilliance and Exotic PC. Catapult Pay was an important driver as well during the quarter. First, customers continued to leverage the feature to originate new leases with more than 20 merchants that were available in our marketplace heading into the fourth quarter. Second, this was a big driver of our performance. We added Walmart to our Catapult Pay marketplace sooner than we anticipated. We saw a very robust response from our customers, and approximately 6% of the leases that originated in the fourth quarter were durable goods from Walmart. We believe this demonstrated our ability to drive demand by offering merchants that our customers really want, and we are one step closer to transforming Catapult into a true shopping destination. Overall, we are reaping the benefits of our investments in our direct integration capabilities in Catapult Pay. Our goal is to leverage both these channels to grow our merchant base and overall consumer reach. Let's now dive into the progress we've made executing our merchant strategy, which are rooted in three key areas. One, growing gross originations by integrating with new merchants. Two, growing our market share with our anchor merchants. And three, ensuring that we offer the variety of durable goods our customers are looking to drive sustainable customer demand. I'll start with a few updates on direct integration. We are very pleased with the quality of the merchants that we've integrated during the quarter. To highlight a few merchants, first, Lenovo. While we've had the relationship with Lenovo since 2017, they opted to pursue a waterfall-only process in 2021. Since that time, we've worked with them to demonstrate that having a direct LTO option as well as a waterfall process fills a meaningful gap for consumers. As a result, we've added Lenovo back as a direct merchant during the fourth quarter. They are already supporting us with marketing on their financing page, which includes Catapult as their only LTO option. We also launched Grown Brilliance during the quarter, as we announced in November last year. Customers have been embracing the brand, and we are excited to have them on board during the engagement season. While some of you may not be familiar with Exotic PC, they are a PC company that crafts custom PCs and laptops for creators, gamers, and professionals. They integrated our LTO option in the fourth quarter, and so far, our customers have been very engaged with their goods. And finally, we also kicked off a direct relationship with MedMart, one of the most trusted names in medical equipment nationwide. MedMart has both online presence as well as brick and mortar stores, and we're excited to recognize them as one of our top 25 merchants during the fourth quarter. Beyond our fourth quarter success stories, we believe we have a robust pipeline of direct integration opportunities that we can continue to steadily convert throughout 2024. But bringing on new direct merchants is only one part of our merchant growth strategy. We are focused on leveraging ways in which we can deepen relationships with merchants that are already on our platform. And we've successfully done it with Lenovo and are working with other merchants to market Catapult on their website and to get Catapult into the lead position versus other LTO operators. In addition, we're exploring new ways to leverage our data to help our merchants with their marketing efforts. For example, we are piloting ways in which we can share the least amount that a customer has been pre-approved to spend with our merchants. While protecting the data privacy of our consumers, we believe we can allow merchants to create a more targeted marketing effort to drive conversion. We have already seen these types of initiatives work well with our largest merchant partner, Wayfair. Throughout 2023, we completed multiple rounds of testing to better understand how it can enhance the parts of our customer journey we directly control within the Wayfair's checkout flow. Our focus was on making sure we were doing a good job educating our consumers about our product and trying to ensure, for example, that customers fully understand pricing and terms, and in an effort to remove friction, increase transparency, and make their customer journey an even better experience. Our hard work with Wayfair paid off in 2023. For the full year, we grew Wayfair gross originations by 5.6%, which was faster than Wayfair's U.S. sales growth for the full year. indicating we are continuing to take share with this important merchant partner. During 2023, applications for Wayfair leases grew by more than 4%, 5%. Further, same-day take rates increased by approximately 210 basis points in 2023, and overall take rates expanded by 450 basis points. During our fourth quarter, however, we saw some softness in our Wayfair gross originations, and they are down slightly compared to 2022. We believe this softness was driven by a few factors, including seasonality. While furniture sales have not been historically a driver of Q4 holiday performance for us, we were able to improve our Wayfair business across several key metrics. Same day take rate at Wayfair grew 340 basis points in the fourth quarter, and their overall take rate grew 370 basis points, which we believe shows that customers who receive a lease offer from us are engaged and ready to convert and that our efforts to provide customers with even more transparencies on their lease terms are bearing fruit. There is one more positive result that I'd like to highlight within our furniture category. Excluding Wayfair, gross originations grew 30% in the fourth quarter. This was driven in large part by the success we're seeing with one-stop bedrooms, which we launched as a direct merchant in December 2022. Since then, we've also added a key user feature, key user features such as a price calculator, which allow our customers to not only see the full price for the durable goods they are viewing, but also their weekly, monthly, et cetera, payments would be if they use the LTO product. This tool also shows customers pricing should they choose to exercise an early purchase option. This has had a meaningful impact on volumes in the fourth quarter. We are pleased with our traction in the furniture category generally and with our Wayfair partnership specifically. Wayfair and Catapult have a mutually valued partnership and we're working hard to grow together by improving marketing and take rates while enhancing the technology behind our product to deliver an even better customer journey. As we look out into 2024, we believe we can leverage the lessons we learned from tailoring our product to fit the needs of Wayfair and its customers to drive growth again this year. And equally as important, we can take these lessons and continue to deploy them across the rest of our merchant base to drive growth. To compliment the work we are doing with our merchants, we are also focused on attracting new customers and enhancing our product experience so that we can capture more wallet share from our existing customers. I'll talk about how we're doing this in a moment. The bottom line is our strategy is working. During 2023, Total application volume grew 13%, and we approved more than 600,000 new leases. This translated into about a 23% increase in the number of lease originations, approximately 15% growth in new customers, and as of December 31st, 2023, we had approximately 19% more active customers than we did at the same time in 2022. At the same time, we continue to offer an experience that our customers love, resulting in fourth quarter customer repeat rate of almost 60%, which is an all-time high for us. And with an NPS score of 52 as of December 31st, we feel confident these data points underscore we are delivering a lease-to-own product that meets the needs of our customers across the U.S. So how are we doing this? We've already talked about how our robust portfolio of directly integrated merchants is driving customer demand and how this is a steady part of our business that we expect to continue to grow. But let's also talk about Catapult Pay. Catapult Pay is a feature in our app that leverages our virtual credit card technology, which is fueled by our proprietary AI and machine learning that allow us to determine what is leasable and what is not. This unique capability allows us to use Catapult Pay to conveniently shop for more than 20 merchants directly from our marketplace. Like our direct integration, Catapult Pay is a great business driver for merchants that gives them access to new and non-prime customer population who, if not for our lease-to-own solution, might not have had the financial resources to purchase their durable goods. But unlike our direct integration, Catapult Pay allows us to onboard new merchants like Amazon, Walmart, Best Buy, Home Depot, and Target, among others, without requiring merchants to invest in a direct integration. In addition, Catapult Pay has allowed us to create a consumer journey that starts in the Catapult mobile app. This means that consumers can start their transaction with Catapult specifically, and we have more visibility into our customer shopping habits and more control over our destiny. Currently, it's a tool that our existing customers are using most, but we can envision a future where Catapult Pay becomes a low-cost customer acquisition channel for us. Our confidence is driven by several data points. First, Catapult Pay has become a trusted channel for customers to start a lease with us. As of December 31st, more than 15% of our current leases were initiated through Catapult Pay. Second, this strong usage led to December being the best month ever for Catapult Pay. Nearly $10 million in gross originations came through the feature during the month, and $20 million in gross originations came through Catapult Pay for the fourth quarter, representing 30% of our total originations for the quarter. For the full year 2023, 42 million of gross originations were generated through Catapult Pay. Third, 14% of the leases that were initiated through Catapult Pay were from actually brand new customers in 2023. And finally, our app itself has become a terrific engagement tool and is the most used channel for our customers to access their lease information. In December, 63% of customer interactions with Catapult began in the app. Whether through Catapult Pay Merchant or a directly integrated merchant, these interactions started in our app. We ended 2023 with more than 500,000 app downloads, up from roughly 125,000 downloads in 2022. And we also had more than 200,000 unique users interact with the app. In short, we believe our app has created a customer experience that sets us apart from the competitive landscape. In addition to Catapult Pay, we continue to do a lot of testing and learning within marketing during the fourth quarter. Similar to Catapult Pay, we believe marketing can help us drive customer demand independent of and in concert with our merchants. Throughout 2023, we put the structure and resources in place to allow us to begin scaling a marketing strategy focused on ROI-positive consumer acquisition and reactivation. We grew our communication volume significantly with a 500% increase in the number of emails we sent in addition of SMS and push notification capability. As we increased our touch points with consumers, we also saw our open rates and click rates increase, and we believe this indicates that our marketing campaigns are resonating. While we're being very prudent with our marketing spend, we continue to believe that our opportunity to build our market share within the underserved LTO industry is considerable. We will continue to test and learn and tie our marketing investment to strict ROI requirements. As a summary about our opportunity to grow our customer base, we feel good about the strong ecosystem we've built. We have direct merchant partners that deliver a steady stream of new and repeat customers. Catapult Pay is an important contributor to our strong repeat customer rate and has potential to blossom into a reliable, low-cost consumer acquisition channel. And finally, we have an emerging market strategy that can prudently scale to amplify growth in both of these channels over time. All this progress we're making is supported by the fundamental strength of our technology platform. From our seamless, direct integrations that get a decision back to a customer in an average of five seconds or less, to our underwriting algorithms that use personal information that a customer has top of mind, to our ability to autonomously onboard new merchants into Catapult Pay, to testing and learning we're doing within our marketing strategy. All this progress sits on the bedrock of our technology. We believe that our direct LTO option and Catapult Pay are creating sustainable competitive advantage that will help support our continued growth and keep us at the forefront of technology in our industry. In addition, our tech advantage has been built upon low-cost, lean, nimble tech infrastructure that allows us to move quickly to scale new solutions and capitalize on growth opportunities that require tech ingenuity. For example, Catapult Pay is powered by proprietary models that determine if a durable good is leaseable. These models allow us to onboard retailers like Walmart, which has a broad spectrum of products available for purchase, including many that are not eligible for an LTO transaction. Given the breadth and depth of their SKUs, without these technology-driven models, it would be very difficult, if not impossible, to bring market-leading retailers like this to our customers. Looking across our competitive landscape, we believe our technology is unique and cutting-edge. Last quarter, we talked a bit about generative AI and our opportunities to deploy it within our tech stack. We are excited to launch our first use case of generative AI in the fourth quarter to help us automate address validation. We created this tool to address the friction some customers were experiencing if there are minor differences in their addresses they provided and what was listed in the merchant database. We can now use generative AI to quickly address what was previously a manual process to update, eliminating a source of customer frustrations. Beyond this, we're exploring ways to integrate generative AI further in catapult pay, marketing, and other areas. Before I turn it over to Nancy, I want to provide a few thoughts on our focus areas for 2024. On the customer front, we understand that our customers are deal seekers, which is why we continue to focus on offering the best and transparent pricing and passing those savings on to our customers. We offer the lowest pricing in the industry and will remain focused on giving our customers the value they need and the experience they deserve. As you know by now, our application process is the best in our competitive landscape. We make it easy for the customers to apply. We don't require bank account information, a lengthy credit history, and we never charge late fees, ever. So in 2024, we expect to see our strategy continue to reflect our commitment delivering value while fostering long-term customer relationships. This approach not only sets us apart in the market, it also drives better performance for our business and significantly increases our retention rate. We are also dedicating effort to making it easier for customers to shop with us. We think that enhancing the shopping journey in our marketplace is another way we can control our destiny and help drive demand. One big area we're exploring is product-based research, product-based search. Right now, customers have to start their searches at the retail level, and we believe we can create options for consumers to shop directly for the actual durable goods they'd like to lease. We can make their experiences even better. In turn, this will help us better understand where the customer is in their journey and what they're shopping for and eventually unlock our ability to do more targeted marketing. Regarding Catapult Pay, we are very pleased with the adoption rate and customer engagement. In 2024, we'll be exploring opportunities to both bring our new merchants that our customers want and further personalize the user experience with the aim of increasing conversions. To round out our customer focus in 2024, we believe we are well positioned to grow our customer base. There are multiple levers we believe we can pull, including continuing to execute our ROI-focused marketing strategy, build out our other customer referral channels, including strategic partnerships, and sustaining high customer repeat rates. Within our marketing strategy, we will continue to focus on making sure our customers can use our market-leading LTO product to shop for all the durable goods they want and need. This means we'll focus on onboarding direct merchants that can help round out our shopping experience. We believe that our high repeat rate is a hallmark of a loyal and engaged customer base and we'll continue to look for ways to sustain this differentiator, which is a compelling piece of our merchant value proposition. In 2024, we'll continue to look for opportunities to leverage our unique platform to solve merchant problems, opening up new growth channels for both Catapult and our merchant partners. We will also continue to look for opportunities to build new merchant referral pipelines, such as the one we created in 2023 with Synchrony. And finally, We will also be looking at opportunities to further leverage our technology and proprietary data to grow our business. First, our technology and data insights will continue to be fundamental drivers of the customer and merchant focus areas I've outlined. Second, we want to look for ways that we can extend our data lead by integrating new resources that will allow us to capture even more underwriting and fraud signals that allow us to offer more leases to underserved customers. And while I won't go into too many specifics today, While from a VIP picture perspective, we're also exploring ways to leverage these competitive advantages to better monetize our growing customer base and create new revenue streams. With that, I'll turn it over to Nancy to discuss our fourth quarter results. Nancy?