Sezzle Inc.

Good day and welcome to the Sezzle Inc. Third Quarter 2025 Earnings 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 your telephone keypad. 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 Joachim, Executive Chairman and CEO. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Sezzle's third quarter earnings call. I'm Charlie Joachim, CEO and Executive Chairman of Sezzle. I'm joined today by our Chief Financial Officer, Karen Harchie, and our Head of Corp Dev and IR, Lee Brading. In conjunction with this call, we filed our earnings announcement with the SEC and posted it along with our earnings presentation on our investor website at sezzle.com. To retrieve the documents, please go to the investor relations section of our website. Please be advised of the cautionary note and forward-looking statements and reconciliation of GAAP to non-GAAP measures included in the presentation, which also covers our statements on today's call. If you're a long-term investor of Sezzle, You're already well aware of how good this team is at navigating and adapting our business model and our product solutions. I continue to be impressed by our team and our ability to adjust and adapt. We're always looking for ways to create win-wins with our stakeholders and also balance profitability, growth, and customer satisfaction. 2025 has been more of the same on that front. We've been testing our launches of on-demand and our shopping solutions and making incremental improvements and adjustments along the way, with a strong weighting towards making our customers' lives better while also continuing to grow with strong profitability metrics. We still believe that BNPL is in its early days and that we are likely to have years upon years of industry growth ahead of us. And we also believe that we're bringing to market a product that is fundamentally a better and more user-friendly credit product than a credit card. Our company and our BNPL industry in general is 100% aligned with responsible repayment of short duration loans that really lean into the concept of budgeting versus outspending your income, like a credit card product can tend to do. Our company and our products are winning and our industry is winning too. If you take a look at slide three, you'll understand a bit of the excitement. We just posted revenue growth of 67% year on year in Q3. Our net income margin for the quarter was over 22%. Our return on equity for the last 12 months exceeded 100%. And our consumer metric measured by mods rose almost 50% year on year. Further, we are raising our EPS and EBITDA guidance for 2025 and have received awards from some of the most respected media outlets, Time, US News, Newsweek, and CNBC. What's our secret sauce? I believe it's our constant drive. We are never satisfied and are always pushing forward. Do we have a chip on our shoulder? Yeah, maybe a little bit. Slide four provides some insight into our restless energy. The consumer is always wanting more, and we aim to fulfill their needs. We have launched several features in our app, most recently the Earn tab, which allows consumers to earn settled spend. Consumers can find and activate offers for things like gas, groceries, and dining. We have a variety of ways for them to engage and win, such as Sezzle Arcade and our educational tool, MoneyIQ. Last quarter, our Earn tab had over 13 million visits, and we just launched it at the end of Q2. I'm crazy proud of our team and how they continue to find new and innovative ways to provide value to the consumer. We continue to evaluate and push forward on additional products. Many of these are being run in parallel, and you've heard me discuss them before. Launch dates are still TBD. but they are all being worked on in various degrees. In June, we brought back one of our former heads of technology, Killian Brackey, to centralize our AI efforts. It's exciting to see the progress they are making across Sezzle. We called out a couple of example projects that the team is working on, a support chatbot and an AI shopping assistant. Both are great examples of how we're able to pull AI into our Sezzle ecosystem. The chatbot is already making a difference for our customer support team. saving them a significant amount of time enabling our team to become more efficient let me take it a step back and tell you a bit about our approach to ai we aren't looking for ways to use ai to cut our team why would we we have incredible growth and cutting people is not something we need to do other than for performance we view ai as a tool to enhance our team's productivity allowing us to further leverage our infrastructure and scale the company faster with more efficient product launches and expansions. So in the case of customer service, it's likely that we'll scale incredibly well here over the next couple of years as the AI tooling continues to evolve and expand its ability to serve end customers. But the way we operate, you'll likely just see that the support team size doesn't grow and may even shrink over the next few years as our efficiency with technology replaces the need to back the members of the team. Our existing members will take on more complex cases and help train the AI systems in place to do more and more. Our marketing efforts are focused on the consumer with the primary goal of acquiring new users, but also reducing churn. The combination of new feature launches and our marketing efforts are reflected in our strong engagement metrics. On slide five, you can see the step up in our quarterly marketing and advertising spend. While we love all consumers that use Sezzle, the ones that with the greatest lifetime values are those that engage Sezzle as either an on-demand user or as a subscriber. As most of you are aware, we created the definition of monthly on-demand and subscribers, also called mods, in the fourth quarter of 2024 when we launched Sezzle on-demand. We anticipated on-demand would allow us to reach more consumers that might be averse to joining a monthly subscription product. However, we also expected it to cannibalize our subscription product. We just didn't know to what extent. Initially, we put most of our marketing dollars towards on-demand because there's less friction to join relative to subscription. And you can see from the results that we quickly grew that product to 264,000 monthly users at the end of the second quarter. However, you can also see that our subscriber count shrank from 529,000 users at the end of the third quarter 2024 to 484,000 users at the end of the second quarter 2025. By the end of the second quarter, we had enough information to evaluate the effectiveness of On Demand. The engagement on the front end was good, but the follow through on conversion was not as good as we would like. What do I mean by follow through on conversion? When we launched On Demand, there were three key tenets. Number one, drive enterprise opportunities. Number two, increase conversion activity at the point of sale. And number three, convert a customer over to subscription eventually. On-demand has clearly positioned us to be more aggressive with enterprise merchants, and I'm happy to note a few wins on slide five as a result. However, it didn't deliver like we hoped on conversions at the point of sale or over to subscription. Further, the profit profile for on-demand is less than our premium and anywhere subscription products. We still believe on-demand is a great tool, and it's a great tool to have in our tool belt, but we have adjusted to how we go to market with it. We're going to continue to lean into it for winning over merchants, but on the consumer side, we're going to lean back into subscription, with on-demand only being used as an alternative tool when it's apparent subscription can't do the job or is meeting some resistance with an individual consumer. As you can see from the results, we pivot our marketing and advertising spend towards subscription products in Q3 with subscribers rising to 568,000 at the end of the third quarter. We remain disciplined in our costs with a payback on marketing for consumer acquisition at six months or less. Across the board, our engagement metrics on slide six reflect the strong momentum we have in our business. Terrific year-on-year and quarter-on-quarter performance. My two favorite metrics on this slide are mods and purchase frequency. Mods is a good indicator of consumer activity within Sezzle over the last 30 days and seeing such strong growth in our highest LTV products is fantastic. While the rise in purchase frequency suggests we are moving to the top of the consumer's wallets. You can see the same sequential dynamics on slide seven. Before turning the call over to Karen, I would like to give more details on our corporate strategic project costs that were called out in our earnings release and later in the presentation. During the quarter, these items added up to about $1.3 million in costs. While these costs are relatively minor, they potentially have some pretty big outcomes. We decided to break these out because they aren't part of our core activities. While they aren't material, we wanted to make investors aware of them. First, our antitrust suit. For obvious reasons, we can't discuss the case. But if you'd like to learn more, you can go to our investor site where we have posted the suit there. We will find out in December if the case will continue forward as the defendant has petitioned the court to dismiss the case. Second is our capital markets exploration. We have talked in the past about our desire to refinance the credit facility given to the size of only $150 million and price of SOFR plus 675 BIPs. We have decided to exercise the $75 million accordion with our current lenders as we head into the holidays, and this will give us more time to evaluate our options. You will see in our 10Q that will be filed tomorrow morning the amendment to our current facility, which increases the size of the facility from $150 million to $225 million. Lastly, our banking charter discovery process. We have hired consultants and attorneys to assist us. Yes, we have an ILC bank partner in a web bank, and they are fantastic. We believe that holding an ILC, which is an acronym for industrial loan company, is the right long-term path for us, as it doesn't subject us to becoming a bank holding company, which has all sorts of implications about capital, capital allocations, et cetera. We believe it will be accretive and add greater efficiency to our business. This is a long process and not a guaranteed process. If we apply, we anticipate submitting an application in the first half of 2026. If we don't get it, it doesn't change what we're doing, and it would not affect the outlook we have. With that, I'd like to turn the call over to Karen to review in further detail our Q3 results. But before I turn it over to Karen, I wanted to let investors know that Karen is retiring and that we're going to miss her dearly. Karen and Amin Sabsivan, our chief operating officer, both joined the company on the same day, and I always say that day was one of the best days Sazzle's ever had. We're going to miss her infectious positivity and her total perfection in completing every task given to her and her team. But I also wanted to tell her how much I've appreciated her support and help along the way. We're definitely going to miss you, Karen. The plan is for Karen to stick around with us for the next 12 months as we transition. And we really feel great about that plan. And I'm also really happy Karen gets to step away in such a great way. Karen, take it away.

Aw, thank you, Charlie. And good evening to all those joining us. The enhancement of our product experience and deeper consumer engagement drove remarkable results for the quarter, as seen on slide 8. Total revenue continues to grow at an exceptional pace, increasing 67% year-over-year to $116.8 million. Our profitability followed a similar growth trend, with gap net income and adjusted net income growing over 50%, to $26.7 million and $25.4 million, respectively. Our margins held steady year over year, with an adjusted EBITDA margin of 33.9% and total revenue less transaction-related costs of 54.2%. Most importantly, alongside our growth is our ability to scale efficiently, evidenced by our non-transaction-related operating expenses decreasing 2.9 percentage points year over year to 27.1%. Now turning to slide nine, which highlights our top line growth. GMV increased 58.7% year over year, making our first $1 billion quarter. As Charlie discussed earlier on slide six and seven, growth in active consumers and higher transaction frequency drove this milestone. Our take rate, defined as total revenue as a percentage of GMV, rose 60 basis points both sequentially and year-over-year to 11.2%. The focus on high LTV products that Charlie outlined on slide 5 is a key driver of take rate strength, and we believe that focus positions us well to sustain this rate going forward. On slide 10, we note our transaction-related costs with detailed components outlined on slide 11. Overall transaction related costs as a percentage of total revenue and GMV increased year over year due to our strategic decision to expand our underwriting aperture and drive top line growth. Specifically, third quarter provision for credit losses as a percentage of GMV increased 70 basis points year over year to 3.1% and is trending toward the lower half of our stated 2025 provision target likely between 2.5% and 2.75%. Despite the slightly higher transaction-related costs, total revenue, less transaction-related costs, as seen on slide 12, continues to grow robustly, increasing 64.5% year-over-year to $63.3 million and representing 54.2% of total revenue. I know we've touched on this during our Prior to Earnings calls of 2025, but we think it's important to continue emphasizing that the expansion of our underwriting isn't without carefully balancing the profitability of the growth we're experiencing. Recent headlines on a few lending companies have also called into question the sustainability of certain sectors of the consumer credit market, but we haven't seen any deterioration as consumer activity continues to perform in line with our expectations. But that is not the nature of our product or our business model as we outlined on slide 13. Not only do our strong gross margins provide us with great flexibility and room to maneuver, but the short duration of our lending product allows us to pivot quickly and adjust our strategy upon seeing any early sign of deterioration in our portfolio performance. On slide 14, you'll see that despite the incremental costs we've incurred in long-term corporate strategic projects that Charlie previously covered, we continue to maintain cost discipline and leverage our fixed cost structure. Non-transaction related costs increased 50.9% year over year to 31.6 million, but decreased 290 basis points as a percentage of total revenue. In the third quarter, we incurred $1.3 million in costs related to these projects, with the largest being the exploration of potential financing avenues, an effort that will continue in a more streamlined manner in fourth quarter. The remaining expenses that make up the core of this bucket, personnel, third-party technology, marketing, and G&A, increased sequentially, largely driven by the timing of equity and incentive compensation in our personnel costs. Bringing the full picture together on slides 15 and 16, GAAP net income grew 72.7% year-over-year to $26.7 million and adjusted net income increased 52.6% year-over-year to $25.4 million. GAAP profit margin expanded 70 basis points year-over-year to 22.8%, while our adjusted profit margin decreased 2 percentage points to 21.8%. Despite this decrease, our margin still remains above our internal goal of operating the business to an adjusted profit margin of at least 20%. Lastly, adjusted EBITDA grew nearly 74.6%, year over year to $39.6 million, representing a 33.9% adjusted EBITDA margin. Turning to our balance sheet on slide 17, total cash grew $14.7 million in the quarter to $134.7 million, even with paying down our line of credit by $13.3 million. Cash flow from operations for the quarter was $33.1 million, bringing year-to-date cash flow from operations to $55.6 million. These results demonstrate the strength of our balance sheet and our ability to self-fund growth while maintaining flexibility in our capital structure. Finally, turning to our outlook on slide 18, we're reaffirming our guidance for top line growth and adjusted net income with modest adjustments to our gap net income to reflect the impact of our year-to-date discrete tax benefit to our EPS to reflect adjustments related to our estimated diluted share count and to adjusted EBITDA. The discrete tax benefit raises our GAAP net income guidance to 125 million, while the updated diluted share count increases our GAAP EPS to 352 and adjusted EPS to 338. As for our adjusted EBITDA, we're raising our range from 170 to 175 million to 175 to 180 million. Lastly, we are also providing adjusted EPS guidance for 2026 at $4.35, reflecting 29% growth over our 2025 adjusted EPS. While this guidance does not reflect any of the future potential products, outlined at the beginning of our presentation, we wanted to give investors a view into the strong fundamentals of our business and our confidence in sustained growth moving forward. Thank you. I will now turn it over to the operator for Q&A.