Sezzle Inc.

Good afternoon, and welcome to the Sezzle Inc. First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please send 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 we'll need a telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I'd now like to turn the conference over to Charlie Yolkin, CEO. Please go ahead.

Thank you, and good afternoon, everyone, and welcome to Sezzle's first quarter conference call for 2025. I'm Charlie Uakim, CEO and Executive Chairman of Sezzle. I'm joined today by our Chief Financial Officer, Karen Harchie, our President, Paul Paradis, and our Head of Corp Dev and IR, Lee Brady. 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. Please be advised of the cautionary note on forward-looking statements and the reconciliation of gap to non-gap measures included in the presentation, which also covers our statements on today's call. I'm looking forward to discussing our first quarter results with you all. as this quarter marked the 12th straight quarter in which we have posted positive year-on-year improvements in revenue and operating income. It's an exciting time for payments industry, and especially buy now, pay later, as our sector continues to grow and gain market share. Even as we're gaining on other payment methods, we still represent less than 10% of the payments market. We believe that our sector will continue to gain share as we gain share within it. We also believe that it is a great time to be in the buy now, pay later space, as there is a heightened level of uncertainty in the economy. Consumer sentiment is dropping, and many consumers seek out flexibility in their finances in uncertain times. BNPL provides that wanted flexibility and allows payments to be matched to budgets. We have said this before, but we will say it again now. BNPL is aligned with responsible repayment. Consumers must be current with us, or they aren't allowed to continue to use us as a payment method. The NPL is very different from a revolving line of credit on a credit card, where large overdue balances can be punted into the next cycle, accumulating large fees and high APRs, leading to a cycle of never-ending debt. We love that we're on the right side of responsible payments. Looking at our first quarter results, we can continue to defy those who say we can't compete with larger, better capitalized competitors. We are doing more than just competing. We are thriving and winning. It turns out that innovation and efficient operations can still produce great returns. Seasonally, the first quarter tends to be our strongest in terms of revenue as a percentage of GMB. As the revenue recognition on payment plans initiated in the fourth quarter rolls into a seasonally lower GMB first quarter. Our provision for credit losses also tends to be improved in the first quarter versus the fourth quarter. The combination of the seasonally better payment trends in the first quarter and a better than expected repayment performance on GMV originated in the fourth quarter led to outsized gross margins and, in turn, outsized net income margins. We will dive deeper into each of these in our presentation. Adding to our strong performance was the launch of our banking partnership with WebBank in September last year. This quarter was the first quarter that we began to see the full benefit of our partnership with them. You can see how it all came together on slide three, where we provide a snapshot of our first quarter results. GMB rose 64% year-over-year, well outpacing the overall BNPL industry. Revenue increased 123% year-over-year, driven by a 77% year-over-year growth rate in our monthly on-demand users and subscribers, which we call mods. These strong top line results coupled with a 70.4% margin for our unit economics and our ability to continue to leverage non-transaction related costs led to a net income of $36.2 million for the quarter. Yes, as you might have guessed, we are bumping up our guidance for 2025. I don't want to steal Karen's thunder on our revised guidance, but as you can see here, we're increasing our 2025 net income guidance by almost 50% to $120 million from $80.4 million and bumping up the 2025 EPS guidance from a split adjusted $2.21 per share to $3.25 per share. We continued to significantly outperform the rule of 40 and our similar version, the rule of 100. Actually, I think we posted a score of over 200 on that metric. We grew revenues by 123% with a gross margin of 70% and a net income margin of 34.5%. That's a total of 227.5. Wow. That will be tough to beat. We're going to keep on trying, though. Look, at the end of the day, we're going to keep letting our results do the talking, even if some folks in the market might not be fully appreciating what we're building here. We are constantly working to enhance our consumer experience. Proof is in the pudding, as our consumer purchase frequency and repeat usage have risen every quarter since the launch of our subscription products in 2022. We're particularly excited about a couple of new product enhancements that are currently in beta stage, pay-in 5 and auto-couponing. We've also stepped into some capital markets activities as another way to enhance shareholder value. As many of you know, our team makes up a large portion of the shareholdings, and with that, we're quite aligned with many of you listening to the call. During the quarter, we announced a $50 million share repurchase program, which went into effect after quarter end. And we also completed a six-for-one stock split to make our shares more appealing and accessible for investors, with the mindset that this would help increase liquidity in our stocks. We believe both decisions are smart capital markets moves. On slide four, you can see with greater detail some of the product tools we are adding. Our product focus with consumers has been in two areas, financial tools and shopping features. We believe it is critical to give consumers as many financial options as possible. One size does not fit all. Providing consumers with more shopping tools, such as a shopping browser extension, price comparisons on products, and auto couponing is all done with the mindset of increasing the value provided to our consumers, which in turn should increase retention and loyalty. These are each very early in their rollout to consumers, so we don't think we will begin to fully experience the impact until Q3 at the earliest. Speaking of rollouts, we are in the early stages of on-demand and what we refer to as mods, as shown on slide five. Mods were up 77% year-over-year to 658,000 and down sequentially from Q4, consistent with the seasonal drop in GMB activity from Q4 to Q1. We are excited about how well on-demand is performing as a new product in our product suite, and we expect it and our subscription products to continue to be the drivers of growth for the company. As shown on slide six, we continue to see better year-over-year engagement and performance on a number of metrics. What's exciting to see is that our connection with the consumer is growing. We are becoming an everyday go-to product for them. The average quarterly purchase frequency increased from 4.5 times to 6.1 times per quarter. Repeat usage increased 60 bps. And our active consumer count rose by 5.4% year over year. I love seeing that subscribers are taking us everywhere as they shopped at 346,000 unique merchants during the quarter. And our sales team continues to focus on integrating with enterprise-level merchants. We signed three in Q4 and added two more signings in Q1, Shields, a Midwestern sporting goods store, and WAP.com, a social commerce platform. We are starting to see the positive momentum from our sales team as evidenced by our signings, but more importantly, by the level of discussions and pipeline development we are seeing with a variety of significant merchants. On slide seven, you can see that even with the seasonal drop after the holiday season from Q4 to Q1, we still experienced sequential improvements in quarterly purchase frequency, active consumer count, and the number of unique merchants shopped at by consumers. I'm happy to point out that our active consumer count rose sequentially for the fourth straight quarter. With that, I'm happy to turn the call over to our CFO, Karen Harchie, who will go over our quarterly financial results in greater detail. Karen?

Thanks, Charlie, and hello to everyone joining us today. Diving into our first quarter numbers on slide eight, you'll see the momentum continues. We're maintaining our upward trajectory with another strong quarter fueled by disciplined growth, improving unit economics, in the expanding impact of our bank program. As Charlie mentioned at the start, we easily met the rule of 40, and for that matter, our own rule of 100. Total revenue increased 123% year-over-year to 104.9 million, and our adjusted net income grew 286% year-over-year to 36.1 million. The substantial acceleration of growth rates at the top and bottom lines is meaningful, reflecting stronger monetization per dollar of GMV thanks to both our mods program and the unified fee structure under the bank program, all while keeping our expenses in check. Slide 9 shows our GMV and revenue yield in action. Total revenue surpassed our fourth quarter holiday shopping period, with our take rate rising to 13% of GMV. Our take rate tends to take a step up from quarter four to quarter one as GMB tends to dip after the holiday season. But we still have the seasonal spillover of payment activity from fourth quarter that occurs in first quarter. Additionally, strong subscriber engagement and a full quarter impact of our partnership with WebBank drove total revenue yield to lead sequential quarter over quarter growth despite the seasonal drop in GMB. On slides 10 and 11, we break down our transaction related costs, transaction expense, provision for credit losses, and net interest expense. As you can see in the breakdown, our transaction expenses substantially benefited from our provision for credit losses as we realized better than expected consumer repayment behavior. We remain focused on driving more consumers through the funnel and we still expect the provision will trend higher over the remaining quarters of 2025 within our guided range of 2.5% to 3%. Alongside our provision, transaction expense and net interest expense as a percentage of GMB held steady sequentially at 1.9% and 0.4% respectively. Year over year, both metrics improved as a result of an optimized transaction processing strategy and our new debt facility that went live last April. Given the current volatility and uncertainty in the market, I want to emphasize the strength of our business model, as seen on slide 12. Since our turnaround in late 2022, our margins have drastically improved, with our trailing 12-month total revenue, less transaction-related costs as a percentage of total revenue, growing 11.9 percentage points to over 60%, for the last 12 months ended in March. The margin expansion occurred all while we've accelerated our volume growth and expanded our risk tolerance. And the critical factor giving us comfort in an uncertain market is the rapid portfolio turnover, with our loan tenor being approximately 42 days and the first loan cohort quality reading two weeks after its origination. meaning we can pivot fast, much quicker than other consumer loan businesses. We're well positioned for whatever lies ahead. To wrap up this point, you'll see on slide 13 that total revenue, less transaction related costs, grew nearly three times year over year to 74 million, representing 70.4% of total revenue. As previously stated, stronger than expected consumer credit performance drove the outperformance for this quarter. Jumping to slide 14, we continue to stay the course to widen our gap between our total revenue, less transaction-related costs, and our non-transaction-related operating expenses, consisting of personnel, data, and third-party tech, marketing, and G&A. Our discipline across all categories, including the deliberate expansion of marketing expense to accelerate growth, leaves us well-positioned to leverage our existing infrastructure and continue this trend. And now our favorite topic here at Suzzle, our profitability, as seen on slides 15 and 16. All prior components outlined resulted in first quarter 25 net income reaching $36.2 million, with our net income margin expanding to 34.5%. Additionally, adjusted EBITDA margin jumped to 49%. Our ability to drive consistent margin performance while growing revenue at this pace validates our strategic plan and reflects the strength of our current business model. And the stability this provides to our balance sheet is particularly noteworthy as shown on slide 17. Cash and cash equivalents grew 15.7 million quarter over quarter, all while we reduced our usage of our line of credit with quarter and incremental borrowing capacity of 52.2 million. As a cash generating business, we believe it's important to highlight our cash from operations, which grew nearly 20 million year over year to 58.8 million for the first quarter of 2025. This provides us with the flexibility to return capital to shareholders, like our recently announced share repurchase program, while also maintaining liquidity for growth investments. Finally, let's look forward. We are excited to announce that we're raising 2025 guidance across the board, increasing top line revenue growth from 20 to 30% to 60 to 65%, and earnings per share from 2.21 to $3.25. I know that's a significant adjustment, especially when you see many companies out there pulling back on guidance completely. So let me walk you through while we're confident about the adjusted outlook. It's important to start by calling out the tailwinds leading to our $36 million net income quarter. First, demand remains strong in the first quarter, which is usually one of our softer quarters. Second, credit performance surpassed our expectations with the provision for credit losses as a percentage of GMV coming in well below our stated expectations. Last, the interplay between our subscription and on-demand products has exceeded our expectations. We expected to see a balance between the cannibalization of subscription and adoption of our on-demand product. Yet, our subscribers are holding up and even using the product more frequently, and non-subscribers continue to engage with our on-demand product. We expect this positive trend to continue providing a strong tailwind for 60% plus top-line growth. That concludes the financial section, and with that, I'll turn it back over for Q&A.

We will now begin the question and answer session. On your telephone keypad, if you want to ask a question, press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Hal Goach with B Reilly Securities. You may now go ahead.

Hey, thank you. Congratulations on a terrific start to the year. My first question is, can you just tell us a little about, you know, your funnel of, you know, new merchants, you know, What types are they? What size are they? It just seems to be that the BNPL is really kind of broadening out. I want to know, you know, what are the kinds of retailers that are knocking on your door you're reaching out to?

Thanks, Al. Yeah, so the funnel is great. You know, obviously we can't announce any names in our funnel, in our pipeline. But we tend to focus more towards enterprise-level merchants now, although we do have a mid-sized funnel as well. But many of those merchants don't, you know, they tend not to be like the more name brands that you would ever announce. So even as we sign and close those midsize deals, you're not seeing a lot of those announcements, or you probably won't. But it's definitely a focus towards the larger side of the equation. I don't know, Paul, do you have anything to add on that?

Yeah, I think that's right, Charlie. I would add that we are starting to push into new categories where BNPL has been late to be adopted. You know, if you go back to the start to BNPL, it was heavy and discretionary categories, but we're seeing a push in categories like grocery, bills. So we're starting to make headway in some new categories that are new to our industry in general as well.

Okay. And when you find these new verticals, are you the solo logo on it or are you another choice for BNPL from another, maybe another provider that's, you know, well-known.

Paul, do you want to answer that? Yeah. Typically what happens is a merchant will want to test the waters with one BNPL provider first, and you'll sign an exclusive contract with that merchant for a period of time. And then once that contract is up, You know, sometimes they'll re-up, but sometimes they'll look to add additional providers so they can capture, you know, the loyal customer bases of different providers. So we are starting to see, you know, more and more merchants adding more BNPL providers since we each have our own captive user bases.

Okay. And the last question for me, I'll go back to the queue, but can you just share with us, you know, like, what is the frequency or the estimates you're seeing from on-demand? You're only about two and a half, maybe two quarters into this. Could you share any more details with us on what you're seeing with on-demand exclusively from, say, monthly subscribers who are paying you a monthly fee?

Yeah, I would say that what we're seeing is monthly sequential growth right now, which tells you we've got a winner of a product on that. And the other thing that I think is attractive with on-demand is that on a per user level, the gross margin per user at the same cohort stage seems to be relatively similar to premium in one of our existing subscription products. So it has a lower barrier to entry, which allows us to bring more consumers into the funnel, which we love. And then once we've got them in on-demand and using us with on-demand, that's where we're starting to use the opportunity to start to market our subscription products for them. Like if you're using frequently, maybe you want to, you know, just sign up for the subscription because it's better, it's a better bargain for you.

Okay. And I guess one last, one last question on, on the notes. It looks like they, despite this growth, your outstanding kind of fell, fell. I guess maybe it's December. It's a back half loaded year. kind of month where you have a little bit more seasonally higher receivable balance on December 31 than maybe a more even-paced spending throughout the first quarter.

Yeah, I think that's some of it. Karen, do you have anything to add on that?

Well, I think, you know, we do have heavy receivable growth in fourth quarter because of the holiday season, and then the payments are coming in still on that in January. So, January, you know, early in first quarters are heavy payment receipts, period. Yeah.

Yeah. Okay. Yeah, because it just looks like you generated just a ton of free cash flow in the first quarter when those payments came in.

That's terrific. That's typical of our quarters.

Yeah. All right. Thank you very much. Good job.

Thanks, Bill. Again, if you have a question, please press star then 1. Our next question will come from Mike Grondahl with Northland. You may now go ahead.

Hey, guys, thanks, and congrats on a very robust quarter. A couple questions. Are you able to quantify or give us a sense of the web bank partnership and the financial benefit you saw there having a first full quarter?

I think probably the best way to do that, it's probably just go look year on year differences in profiles of the company. You know, you, if you look at fourth quarter to first quarter last year versus fourth quarter to first quarter this year, maybe a couple of quarters more, I think you'll start to see like where web bank is helping us. And it's, I mean, I think the gist is look at our revenue yield as a percentage of GMB. That's a big part of it. Cause there was a number of States where we were running suboptimally and because we're going to state by state with web bank. We're basically just ran the product as designed through web offering the lending products and not sizzle. So I think that's basically where you can probably pick up a lot of the differences. I know, I know some of that's, it's not a true AB because we've got other products in the mix, but I think you'll kind of get a sense.

Revenue yield.

Got it.

Got it. And then, you know, The 658,000 of on-demand and monthly subscribers, mods now, you talked about the stickiness of those monthly subscribers. What would you attribute that stickiness to? Your shopping experience, just the overall consumer experience? It sounded like you were surprised by, you know, how strong, how sticky the monthly paying subscribers were. So just like a little more color there.

I, you know, the story I kind of give when I think about this is, you know, I think early, think early days credit cards because early days credit cards were kind of similar to early days by not pay later. Not that I was alive back then, but from what I've read, but imagine like you have a chase card and you go into a restaurant and they're like, Oh, we only accept Amex here. You know, now you have to have an Amex card to shop at that, you know, be at that restaurant or be at that store, which I think early days credit cards, that's basically what was happening. So early days, BNPL, same kind of thing. It was, oh, you've got to have Sezzle to shop at this store. Oh, you've got to have one of our competitors shop at another store. That can be kind of annoying, I think, for a customer. And so with our subscription product and now on demand, I think it just creates like an ease of mind or ease of use aspect to the product. I don't have to care what that store is. thinks I should use, I can just, you know, the heuristic, I can just use Sezzle. I don't have to think about it. I'm going to get paying for, I like how Sezzle operates. I like their app. I like their functionality. I can just go in there and tap now because I've got anywhere or premium or on demand. And I think that just creates an ease of use for the, which is value for the customer. And now they can use that card everywhere. Just like, you know, just like you probably use the same credit card everywhere if you just don't want to think about it. So that's what I would think it would be like.

Fair, fair. Okay. And then, you know, I get asked a lot about credit quality. The 1.6 was, you know, nicely lower than where you guys were thinking it was going to be. And I know you've loosened credit quality and clearly we've seen that in the volume. Could you just talk about how you're managing credit quality and, Um, I think that would be helpful. And then I have one more after that.

Yeah, we're, you know, we know our profitability levels are a lot stronger year over year, which basically we're shooting for that 60% type gross margin. And so if you know that your top lines at a higher level, you can, you can accept a little bit of a higher cost to still hit the same gross margin and that cost, you know, PLR that we're talking about. So that allows us to be a little bit more open. Um, But, I mean, trust me, we're not trying to just open up to grow volumes. We think about it in terms of ROI and in terms of maintaining gross margins that we like to maintain. So that's probably why we came in where we did. Plus, with first quarter, there's always provision. And so in fourth quarter, we have to provision, which is an estimate of what we think the losses will be on those loans. And we had a little bit better than expected results as well. So that led into the 1.84 or the number for the first quarter of PLR because we have to make an adjustment when things come in better than we expected. And then the first quarter itself is just a good quarter for this customer because they tend to be getting tax refunds. So that all kind of played into it. But, you know, we gave that guidance of like the 2.5 to 3% PLR for the year. And for now, we're sticking with that. We still think that, you know, that's probably the right range, even though the first quarter is coming in much lower than that.

Got it. And then, Hey, just lastly, can you give us a little bit of color about paying five and auto couponing, couponing, just describe those at least.

Yeah. So paying five, we did a survey to our customer base and it was, and not just our customer base, but also BNPL users outside of our customer base and ask them, you know, paying five versus paying four, what do you like? And I know some of it kind of seems common sense. Someone would take an extra payment, but the results were really surprisingly positive. And so I think most of business is common sense, quite frankly. I don't think a lot of it is rocket science. And when our customers and other potential customers are saying that they would really love that type of a product, we were like, okay, let's get that in the mix and try it out. And what we're seeing so far is it looks pretty good. We're pretty happy with the results so far. It's still early. It's less than 10% of our volume at this stage. And so that's really the gist of it. It's nothing like extravagant. It's just basically, instead of it being a six-week product, it's an eight-week product with slightly lower payment amounts. And customers just like that from what we're seeing. So we feel good about that. We're probably going to keep on increasing volume to paying fives as long as we keep on seeing good results, you know, in terms of profitability, in terms of repayment, in terms of uptake from customers. And then auto-couponing, basically the idea behind that is just keep on helping our customer. You know, so Our customer is mid to low income, younger customers. And if you can surprise and delight them by all of a sudden they're shopping at Dave's Sporting Goods and we found you a $15 coupon that you didn't even know existed, well, you're going to remember that. No doubt about it. These customers will remember it. That'll create loyalty and retention and keep them around our ecosystem. And that's really the idea there is we're not doing a lot on the shopping side, I'd say, to increase profitability levels. It's more about just giving this customer tons of value for being in this as an ecosystem. That's the main part of it right now.

Fair enough. Hey, go Wolves. Thanks, guys.

Yeah, and go Wolves, for sure.

This concludes our question and answer session. I'd like to turn the conference back over to Charlie Euken for any closing remarks.

Thank you, Operator. And also a big thank you to the Sezzle team. We continue to execute on a high level, which is why we continue to outperform in our results. I'm sure of it. And in closing, out of homage to Warren Buffett and his upcoming retirement, I'd like to tell a Warren Buffett story. Send the call. In the early 1960s, American Express was embroiled in a huge scandal. A company called Allied Crude Vegetable Oil used fraudulent collateral, barrels filled with mostly water, not oil. to borrow millions from banks using Amex's letters of credit. When the fraud was exposed, Amex stock plunged by over 50%, and everyone thought the company might collapse. Warren didn't panic. Instead, he dug in a little deeper. He realized that despite the scandal, the core Amex business was doing just fine. He talked to bank tellers, bank officers, credit card users, hotel employees, and restaurant workers to get a feel of whether usage had fallen off. Based on that research, Buffett concluded that while Wall Street had punished Amex by battering the stock price, Amex's reputation hadn't been tarnished on Main Street. The research led to a very large investment in Amex at that time. Buffett invested around $20 million in Amex, which was over 40% of its fund size, and around 5% of Amex's market cap. The results? Amex stock tripled from that point within a couple of years and became one of the first home-run investments for Buffett. Warren's lesson, and his quote, the stock market is a device for transferring money from the inpatient to the patient. That's the story. Cheers to the patient, long-term holders of Sezzle. Have a great evening, everyone, and thanks, operator. We'll end the call now.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.