Sezzle Inc.

Good day and welcome to the CELTO, Inc. Fourth Quarter Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Charlie Uekim. Please go ahead.

Thank you. And good afternoon, everyone, and welcome to Sezzle's 2024 Fourth Quarter News Call. My name is Charlie Uekim. I'm the CEO and Executive Chairman of Sezzle. I'm joined today by our Chief Financial Officer, Karen Harchie, our Head of Corp, Dev Nair, Lee Brading, and our President, Paul Ferdis. In conjunction with this conference call, We filed our earnings announcement with the SEC and posted it and the earnings presentation on our investor website at sezzle.com. To retrieve the documents, please go to the investor relations section of our website. There you will find the press release and the earnings presentation under the investor relations section of our website. Please note the cautionary note on forward-looking statements and the reconciliation of GAAP to non-GAAP measures included in the presentation, which also covers our statements on today's call. I am very excited to share our fourth quarter and fall year 2024 results, as well as an updated guidance for 2025. It's hard to imagine that 2024 was only our seventh year as a company. To say that we are in early innings is an understatement, and I mean early innings as a company and a sector. We've had exceeded a high level for our entire history to gain market share on our larger peers. With head starts ranging for five to 20 years relative to us, almost every major competitor in our industry has raised over $1 billion in equity compared to our 120 million. And we're still gaining share. I'm not sure how familiar you are with the book and film Moneyball, but I think we might be the Oakland A's of the BMPL industry. We've had to do more with less as we don't have the luxury to blow cash. And by the way, I don't think blowing cash is a strategy. And yet here we stand outpacing most of the longer established peers in terms of profitability and growth. I'm extremely proud of our team as our success is directly connected to their creativity, dedication, and hard work. Our team is a winning team and our sector is a growth sector. It's a great combination. It is clear that Buy Now, Pay Later as a payment segment is here to stay. Various third-party reports call for the BNPL industry to continue at double-digit annual growth rates for the next five to 10 years. While we continue to ride the BNPL wave, we also believe that we can continue to outpace and take share within the segment. And logically, it just makes sense why BNPL continues to grow. The BNPL product can give users greater flexibility in payments and match their payments to their budgeting needs. And in a worst-case scenario, it can help users avoid the cycle of debt. Because if they can't make a payment, then they aren't allowed to make another purchase. The same can't be said for some other payment methods. Credit cards tend to be the inverse. Once a customer can't make the full payment, they become a revolver and in many ways stuck with a balance for a period of time. We love our alignment with responsible repayment. One knock in the BNPL space has been that it doesn't enable users to build their credit histories. Well, we have an answer for that, but we are unique. We have a product that consumers can opt into if they want to build their credit history, Suzzle Up. It's both free and optional for our customers. Please take a look at Suzzle reviews when you get a chance. You'll see how many users talking about the positive results from Suzzle Up, which we're proud of. Another great example of the early innings concept is the launch of our banking partnership with WebBank at the end of September, 2024, which has positioned us well for the future. The program has lived up to our expectations. and has enabled us to launch a key new product with On Demand. On Demand was just introduced to consumers in Q4 after we went live with WebBank. It is still very early in its history, only a matter of months at this point, but we believe that we have succeeded with yet another initiative at the company with the launch of On Demand. We've added another product that we know our customers want and our improved activation rates support that idea. We will provide further details later in the presentation. As we look back at 2024, it was fulfilling to see the fruits of our labors turn up in the financial performance. In 2024, net income increased more than tenfold compared to 2023 on the top line that outpaced the industry. As we look forward to 2025, we anticipate another year of industry outperformance as we expect double-digit revenue growth with our pre-tax net income rising at least 55% compared to 2024. Meanwhile, we remain focused on enhancing the shopper experience and launching new products that consumers want and need. Although we have several future product offerings under consideration, our near-term focus is on maximizing our on-demand launch and improving the shopping experience and engagement in our app. We will touch on these topics in greater depth in the presentation, so let's go to slide three where we can start to dive into the quarterly and annual results. In 2024, we exceeded expectations on the top and bottom line. In Q4, we experienced heavy engagement during the holiday season with our revenue growing more than 100% year over year. We met the rule of 40 and our own rule of 100 on revenue growth alone for the fourth quarter. It's also great to see us delivering a strong margin at the net income level as well, not to mention a healthy return on equity for shareholders. This quarter, because of the success of On Demand, we're introducing a new concept, mods, which stands for monthly on-demand and subscriber users. In December, we had 707,000 mods at the quarter end. That represents 130% year-on-year increase and an increase of 178,000 users since the end of the third quarter. We are excited by this increase in activity as on-demand was live on a limited basis in the quarter because we were still rolling it out to all users. We tend to roll out products gradually as we launch them. And we're a bit more cautious about new products in the fourth quarter when some users tend to overspend. One other item on 2024. Back at the end of the second quarter, we gave guidance of a mid twos for principal loss rate as a percentage of GMV for the back half of the year, which we nailed. We believe that 2025's principal loss rate will be in the range of 2.5 to 3% as we continue to prioritize growth. Newer user groups have higher loss rates And now that we have built a better mousetrap, we want to put it to use. As discussed earlier, we are highly focused on improving shopper engagement in the app. Slide four represents some of the initiatives we're working on. Many enhancements are recent or just launching, so we have yet to see the full potential of the offerings. Our product marketplace continues to gain momentum as orders placed there averaged a growth rate of 39% month over month growth during 2024. I'm also very excited about couponing. Who doesn't want to take advantage of discounts on purchases? I'm sure even investors on this call use couponing apps. But I'm certain that our typical customer uses them heavily, and in many cases needs them to stretch their paycheck. We believe this product will solve a need for our customers, increasing their retention and loyalty to us, all while we pull in adjacent customer groups that we can introduce Buy Now Pay Later to. We are just starting to roll out couponing and other shopping features. So likely be until Q3 or Q2 that we see the full benefit from the increased shopper activity. But now let's talk further about a key product that was launched on demand shown on slide five. We couldn't have launched this paying for product without the banking partnership. On demand fills a need as it allows customers to use paying for everywhere visa is accepted. Even if the shopper doesn't have several premium or anywhere. When we launched the product, there were two areas that we felt that would help. First, it would make us more competitive for enterprise merchants as we could pass on some of the costs to the consumer at the checkout. Enterprise merchants love lowering their costs, and this design helps scratch that itch. Second, it would create a greater customer activation within the purchase funnel as non-subscribers can choose to incur a one-time service fee at the point of sale instead of signing up for a subscription to shop anywhere Visa is accepted. On-demand has a much lower barrier to entry than our subscription products. And over time, we believe it will become a bridge into subscriptions. I'm happy to say that our initial thesis was correct. In Q4, we signed three enterprise-level merchants, Backcountry, Beals, and Rural King, with GMVs ranging from approximately $700 million to over $1.5 billion. Meanwhile, the activation rates of users downloading our mobile app to placing an order have risen 35% from September to January. Again, just getting started, but early indications are positive. Don't just take our word for it. Look at the MPS scores from consumers. A 61 for on-demand. It's clearly a great complementary product with premium and anywhere, which have similar MPS scores of 57 and 67, respectively. We noted last quarter that we expect to see a tradeoff from subscription to on-demand, as consumers will have more options when shopping with Sezzle. We even noted that the interplay between on-demand and our subscription products could even cause subscriber count to decline. Nonetheless, we believe on-demand is a win-win, as we expect it will lead to a successful long-term consumer conversion and higher LTV shoppers, which ultimately leads to greater financial performance for Sezzle. Based on what we're seeing early on, it looks like the average top line revenue from an on-demand user is very similar to a premium user, which makes us even more confident in our approach. Speaking of engagement and performance, please turn to slide six, where everything is green. We are experiencing strong year-over-year engagement across the platform. We have talked a lot about our performance from the viewpoint of the consumer. What's great to see here is that consumers are also shopping at a much higher number of merchants with Sezzle than they have in the past. During the year, consumers shopped at 598,000 different merchants. While we are integrated directly with over 20,000 merchants, With our on-demand and subscription products, it doesn't matter, as those users can shop pretty much anywhere, and it shows in the number of unique merchants shopped at by consumers in our results. The year-over-year comparisons are impressive, but we are also seeing incredible sequential growth, as shown on slide 7, across mods, active consumers, and unique merchants shopped. With that, I'm happy to turn the call over to our CFO, Karen Harchie, who will go over our quarterly and yearly financial results in greater detail. Karen?

Thanks, and happy birthday, Charlie. Hello to all. On to slide eight. I feel a little bit like a broken record for the last several quarters as we keep reaching new highs, but that's a problem I will happily accept, as it is always great to share a performance when the results are this good. The strong holiday season plus the bank program launch led to a 100% year-over-year increase in revenue for the fourth quarter compared to the prior year's period. Our outperformance for the quarter drove total revenue for the year to $271 million, a 70% increase from 2024. As a reminder, we have provided adjusted numbers to remove the non-recurring items which can mostly be attributable to the release of the valuation allowance previously recorded on our deferred tax assets. We believe this provides a more reflective run rate of the company's results and will be useful as we report in 2025 for comparison purposes. Adjusted net income was $26.5 million for the quarter and $66.2 million for the year. Each is up approximately 10 times or more compared to the prior year's period. The significant gains year over year were driven by revenue growth, unit economic gains, and our ability to further leverage non-transaction operating expenses. We will jump into the details of each of these beginning on slide nine. For the year and fourth quarter, year-over-year revenue growth outpaced the rise in GMV, driven by subscription growth and fee unification because of the bank program. As a result, revenue reached a new high of 11.5% for the quarter and 10.7% for the year. We have bundled our transaction-related costs of transaction expense, provision for credit losses, and net interest expense on slide 10. Each of these have behaved as anticipated. Transaction expense, which is primarily payment processing, was flat sequentially at 1.9% of GMB. We continue to believe we can maintain a level around 2%. Net interest expense continued its downward trend as we benefited from the lower cost facility that we entered last April. we have the opportunity to further lower our net interest expense by the end of 2025 as our facility can be refinanced in October without any early prepayment penalties. Last but not least, our provision for credit losses performed in line with our expectations and the guidance we gave to the market back in second and third quarters that our provision will be in the mid of 2024. Note the reason for the increase in the second half relative to the first half was twofold. First, natural seasonality as the provision typically reaches its high point in the fourth quarter. And second, and more importantly, we made a conscious decision to open up the funnel to more consumers given the confidence we have in our underwriting models. As Charlie mentioned, we expect provision to be between 2.5% to 3% of GMV in 2025. Let's quickly review a summary of Sezzle's underwriting ecosystem on slide 11. Amongst our many proprietary machine learning models, we have specific models for new customers to Sezzle and returning consumers. Our models are strong predictors of consumer performance and enable us to properly set spending power levels for consumers. We are currently developing the fifth generation model for existing consumers which will take into consideration our recent fourth quarter launch of On Demand. So let's see how we put our money where our mouth is on slide 12. Again, to remind you that our goal is to optimize not only our growth, but also our profitability. As you can see from the graph on the left, late in second quarter, we began increasing approval rates for both repeat customers and new customers. which correlates with us having a higher provision in the second half. However, we believe that our underwriting models have allowed us to do so judiciously. The chart on the right shows that we have increased the balances for non-delinquent customers while keeping average balances for delinquent customers in check. Our ability to separate performing versus non-performing customers is crucial to us, opening the funnel, per se. For further proof, our financial performance bears out our actions. On slide 13, you can see that our transaction-related costs, inclusive of the provision for credit losses, declined in the quarter, both sequentially and year-over-year. To come full circle, turn to slide 14. Throughout the year, we have provided guidance that our total revenue less transaction-related costs would be 55% for the year. I'm happy to report that we were ahead of that number as we achieved 55.7%, which includes our provision for credit losses. Now let's move on from our unit economic discussion and turn to slide 15, which internally we have finally come to call Charlie's slide. Quite simply, in terms of financial performance, our goal is to make the green line on the right outpace the red line below it. As a technology-driven company, we believe we should be able to continue to leverage our operations, and we look forward to widening the gap. The main components of non-transaction-related operating expenses are personnel, data, and third-party tech, marketing, and G&A. The wild card, so to speak, amongst these is marketing and advertising. That said, we are very focused on payback and return on cash. Generally, we target a six-month payback. All of this is translated to a strong performance on the bottom line, as shown in slide 16, for both net income and adjusted net income. We've been able to post adjusted net income margin above 20% for three straight quarters. We've also been able to generate an EBITDA margin in excess of 30% for four straight quarters, as shown on slide 17. Our improved profitability has strengthened our balance sheet and our liquidity is reflected on slide 18. At year end, we had 98.3 million in cash on the balance sheet and 39 million of unused borrowing capacity available. 25.1 million of the cash balance is restricted with 20.3 million designated as long-term restricted cash, which is required to be maintained as a reserve account under the terms of our marketing and servicing agreement with our originating partner, WebBank. I'm guessing by this point you have already reviewed slide 19 before even listening to our presentation. Let me highlight a couple of items before turning it over to Q&A. Prior to today, the only numeric guidance we have given for 2025 was an EPS of $12 for both net income and adjusted net income. We are bumping up our 2025 EPS guidance to $13.25. For 2025, we will continue to present an adjusted number for comparison purposes and to remove non-recurring items. Further, we have provided additional metrics for 2025 that we have traditionally given for previous periods. An important call out is that we will be provisioning for a full tax burden in 2025. I guess that's the penalty for being profitable, which is why we've added the note at the bottom, 2025 guidance implies pre-tax net income growth in excess of 55%. With that, I would like to turn the call over to the operator as we are ready to answer your questions. Operator, will you please open the lines for Q&A?