Sezzle Inc.

Good afternoon and welcome to SESL's first quarter 2026 earnings 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 touchtone 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 Joachim, CEO and Executive Chairman of Sezzle. Please go ahead.

Thank you and good afternoon and welcome to Sezzle's first quarter 2026 earnings call. I'm Charlie Joachim, CEO and Executive Chairman of Sezzle. I'm joined today by our CFO, Lee Brading, and my co-founder and company president, Paul Paradis. In conjunction with this conference call, We filed our earnings announcement with the SEC and posted it along with our earnings presentation on our investor website at Suzzle.com. To retrieve the documents, please go to the investor relations section of the website. 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. Before diving into the quarter, I want to start by touching on the big picture for 2026. We believe it is going to be an exciting year for Sezzle. 2025 was about enhancing our current consumer ecosystem. We improved the app experience, expanded the engagement features, leaned back into higher-value consumers, and continue to give our users more reasons to come back to Sezzle. But in 2026, we are pushing that strategy further We are moving beyond being a product consumers think about only at checkout. Our ambition is to serve our consumers more broadly in their everyday lives and in the way they manage everyday spending. That means continuing to build around payments, but also expanding into areas like deposit accounts, card products, enhanced lending options, our recently launched Sezzle mobile plan, and more. The goal is simple, create more value for the consumer create more reasons to engage with Sezzle, and over time, make Sezzle a critical part of our consumers' daily lives. The strategy is working. In the first quarter, we delivered strong growth, strong profitability, and improved engagement across the platform, and we are raising our full-year guidance as a result. We are still very early in what Sezzle can become for the value-focused consumer. With that, let's dive in. The first quarter followed a similar and important pattern to the first quarter of last year. Better than expected credit performance helped drive strong margins and bottom line results. The strength in repayment trends also gave confidence to improve more volume while staying disciplined on risk, helping drive GMV that nearly matched the fourth quarter holiday period. We also saw the benefits of the investments we made throughout 2025 to create a more engaging product ecosystem. Average quarterly purchase frequency increased by a full purchase across the consumer base, reaching 7.1 times in the quarter compared to 6.1 times in the first quarter of last year. That's a meaningful increase, and it tells us our consumers are coming back to Sezzle more often and finding more ways to use us. Those factors help drive the results you see on slide three. GMD grew 37.3% year over year. Total revenue grew 29.2%. and our gross margins reached 74% of total revenue. We also generated 51.3 million of net income representing a 37.9% profit margin and 71.1 million of adjusted EBITDA representing a 52.5% adjusted EBITDA margin. Given the strength in the first quarter and the growing engagement we're seeing across the platform, we are increasing our full year 2026 guidance across the board. We are raising total revenue growth guidance from 25% to 30% to a new range of 30% to 35%. We are also increasing adjusted net income guidance by $10 million to $180 million and raising adjusted EPS guidance to $5.10 to $4.70, with some benefit from repurchase activity in the first quarter. We will provide more detail on guidance later in the call, but overall this reflects our confidence in the momentum of the business. A key factor in the recent growth of our business has been the payoff of our reinvestment and refocus on our subscribers, our highest LTD users on the platform, which you'll see depicted on slide four. Our investments continue to pay off in the first quarter, with total subscribers increasing by 44,000 to 714,000. The overall total mods sequential decrease is due to the decrease in monthly on-demand users. a drop which reflects the seasonality of our platform from the busy holiday shopping period to the lower activity we see in the quarter after, along with a de-emphasis or a renewed focus on our subscribers. Turning to slide five, much of that subscriber momentum traces back to the continued investment we are making in marketing. Since we began leaning harder into this effort in late 2024, we have tested a number of campaigns, funnels, and pathways to reach new consumers. Like most things at Sezzle, there has been trial and error along the way, but I think it's clear that we are starting to catch our stride in finding the most effective ways to win subscribers and drive greater engagement across the consumer base. The best part is that we have been able to push spending higher while still maintaining attractive returns. Marketing spend increased again in the first quarter, but we continue to see a payback period of less than six months. That gives us the confidence to keep investing where we are seeing performance. To be clear, the goal is not just to acquire any user at any cost. The goal is to acquire and retain consumers with the highest lifetime values, the ones who transact more frequently, demonstrate stronger loyalty, and give us more opportunities to create value over time. In practice, that means subscribers, repeat users, and consumers who engage across multiple parts of the Fezzel ecosystem. The Earn tab is a great example of how our product and marketing strategies reinforce each other. Since launching in June 2025, the Earn tab has generated 4.8 million visits. And consumers show a 55% increase in BNPL conversion within 30 days after their first Earn tab activity. This is exactly the type of engagement loop we want to build. That brings us to slide six. PAN 4 has been the foundation of the business, but consumers are asking for more, more utility, and more ways to use Sezzle beyond a single checkout moment. In the first quarter and shortly after quarter end, we made progress on several fronts. We expanded short-term installment optionality with PAN 5, launched and enhanced the long-term lending capability across the entire BMPL product suite, introduced the virtual card in Canada with select integrated merchants, and launched the Sezzle mobile plan on AT&T's network with an unlimited wireless plan starting at $29.99 for Sezzle Anywhere members. Each of these products has slightly different use cases, but the strategic theme is the same. Expand what a Sezzle relationship can do for the consumer. Turning to the next slide, AI continues to be a major focus across Sezzle. We are not treating AI as a side project or a small productivity experiment. We are embedding it into how we build products, support consumers, analyze data, and operate the business. On the consumer side, we recently launched our AI support chatbot, and it's already resolving approximately 60 to 70% of the chats without escalation. That improves speed for the consumer while allowing our support organization to handle greater volume with the same disciplined cost structure. We are also testing our AI shopping assistant, which is driving stronger click-to-order conversion and helping consumers find the right products with less friction. Internally, we're using AI everywhere in the company to improve efficiencies and automations. We're using it to help analyze chargebacks, improve business intelligence, increase support quality, improve access to company data, and speed up engineering workflows. Taken together, these efforts do three things. improve the consumer experience, increase output across the company, and scale the business while keeping expense growth well below revenue growth. All of this points to a broader vision, which the next slide lays out. Sezzle started with paying for, but we are no longer just a paying for company. We are building an all-in-one services platform for the value-focused consumer. The strategic goal is to make Sezzle more useful in more moments. The more value we provide, the more reasons consumers have to come back. That drives engagement, supports retention, and strengthens the consumer relationship over time. We still have a lot ahead of us, including products like bank accounts and greater post-purchase split capabilities, among other ideations. And overall, the real test of this strategy is engagement. If the product ecosystem is working, we should see consumers using Sezzle more often across more merchants and across more use cases. That's exactly what we saw in the first quarter, as seen on slides 9 and 10. In the first two boxes, mods and quarterly purchase frequency prove out the ROI across products and marketing. Even the sequential increase in quarterly purchase frequency, seen on slide 10, jumped to a whole new level, reaching a half purchase more than our busiest quarter of the year. To me, all of these metrics you see on slides 9 and 10 are a clear sign that we are moving in the right direction. We are still early, but the flywheel is getting stronger. And with that, I'll turn it over to Lee.

Thanks, Charlie, and good evening to everyone joining us. I will start on slide 11. But before getting into the details, I want to highlight the seasonality in our business. From a revenue yield standpoint, which is simply total revenue divided by GMV, Q1 is typically the peak of the fiscal year, as some payments from Q4's holiday season spill over into Q1. The quarter is also typically the best performing quarter in terms of our provision for credit losses as a percentage of GMV, because our consumers generally benefit from tax refunds at the start of the year, thus leading to better loss rates in Q1. As a result, Q1 is usually the best quarter in terms of margins. While we would love to just annualize the unit economic margin of 74%, we can't. And if you look back to last year's results, you will recognize that dynamic. Even though we had a tough year-over-year comp this quarter, you can see the strong momentum in our business as we reached all-time highs in adjusted EVTA margin and total revenue, less transaction-related costs as a percentage of total revenue. As noted earlier by Charlie, our marketing spend more than doubled year-over-year in the quarter. Nonetheless, we were able to leverage non-transaction-related operating expenses by 30 basis points year-over-year. Top-line growth and leveraging our non-transaction-related op-ex combined with strong unit economics resulted in net income outpacing total revenue for the quarter. For those playing the rule of 40 game at home, which we measure as revenue growth plus EBITDA margin, we exceeded a score of 80 in Q1. On slide 12, you can see the strong momentum in our business as Q1 GMV of 1.1 billion nearly surpassed Q4's holiday season GMV of 1.2 billion. Sequentially, our revenue yield rose to 12.2% from 11.2% due to seasonality, which I addressed in my earlier remarks. Year over year, however, revenue yield declined 80 basis points due to the mix in merchant and virtual card activity, plus a reduction in the number of consumer fees charged. Slides of 13 through 15 dive into our unit economics, which are powering our bottom line results. As a reminder, transaction-related costs is a non-GAAP measure that combines transaction expense, provision for credit losses, and net interest expense. You might hear us refer to gross margin or net transaction margin, which is total revenue less transaction-related costs. Let's jump to slide 14 and review the three cost components of transaction-related costs. Each of the three components had a favorable year-over-year move. Transaction expense, consisting mostly of payment processing costs, continues to experience the benefits of us driving consumer adoption toward lower cost payment channels such as ACH. Meanwhile, our provision for credit losses fell year-over-year because of the better than expected performance in the current year's portfolio, as well as prior year vintages. Further, we are not seeing any unusual strains on the consumer, and as noted earlier, Seasonally, this is our best quarter for provisioning for credit losses. But the story is not simply about consumers doing better than expected. Our team continues to enhance their toolkit and decisioning. Our underwriting team is exploring new data sources, accelerating model iterations, and utilizing new machine learning techniques and collections. All of these add up to improvements as we scrutinize every lever of our underwriting inputs. Net interest expense remained low at 0.3% on GMB. There is further room for improvement here as we move forward with refinancing our current credit facility, which matures next April. Slides 13 and 14 demonstrate our hyper-focus on unit economics and its components. It is evident how it all comes together in slide 15. We continue to find ways to improve our economic model and not sacrifice growth. We recognize the importance of profitability as it allows us to pursue strategic initiatives that will further propel the business. As we have stated in the past, our goal is to drive our business and profitability with revenue less transaction related cost in the 55% to 65% range. Our hyper focus on cost does not stop at the unit economic line. It extends to our non-transaction related operating expenses too, as shown on slide 16. Even as we more than doubled marketing spend year over year, we continue to generate operating leverage across the business, particularly in personnel costs. While our team has grown, we have scaled thoughtfully and remain disciplined in where we add resources. Looking ahead, we expect to continue leveraging our operating expense base while still investing in the areas that are delivering attractive returns. We did incur minor costs related to our corporate strategic projects during the quarter. Our antitrust suit is currently ongoing and something we cannot elaborate further on. We are making progress on the banking charter process and have moved beyond the discovery phase, as we are now actively hiring executives and non-executive directors. We anticipate submitting our application mid-2026. We recognize this process is long and not guaranteed, but we believe it is an important strategic opportunity to pursue. Bezal's significant momentum is evident in our bottom line results shown on slide 17. Driven by a healthy unit economic story and leveraging our non-transaction related optics, Net income outpaced our top line growth. For the quarter, GAAP net income reached 51.3 million, representing a 37.9% profit margin. Adjusted net income was 50 million, and adjusted EBGA was 71.1 million, a 52.5% margin. Each of these reflects an all-time high for Sezzle. Our liquidity remains strong, as shown on slide 18, as we ended the quarter with 147.4 million in cash, including 26.9 million in restricted cash. In addition, we had $69 million in availability under our line of credit. Working capital did build relative to previous quarters due to the launch of Pay in 5 in January. But as noted, we have plenty of liquidity. The strength of our liquidity and cash flow generation is further exemplified by us repurchasing $24.8 million worth of common stock during the quarter, which will be disclosed in our 10Q that will be available tomorrow. On slide 19, we update our guidance. we are raising our guidance across the board. We now expect revenue growth of 30% to 35%, adjusted net income of $180 million, and adjusted net income per share of $5.10. Before passing the call over to the operator for Q&A, I want to remind investors of a few items. First, we target total revenue-less transaction-related cost margin of 55% to 65%, and within this margin calculation, we target a provision for credit losses in the 2.5% to 3% of GMV range. Second, we expect to continue to leverage our non-transaction-related OPEX as we anticipate growth in the top line to outpace our spending. Third, do not forget about the seasonality in our business that I discussed earlier in the call. And last, this guidance does not reflect any projections for new products currently in development. With that, I would like to turn the call over to the operator for Q&A.