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.