This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Good day and thank you for standing by. Welcome to the Prague Holdings Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Baugh. Vice President, Investor Relations. Please go ahead.
spk13: Thank you, and good morning, everyone.
spk11: Welcome to the Prague Holdings third quarter 2022 earnings call. Joining me this morning are Steve Michaels, Prague Holdings President and Chief Executive Officer, and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning. which is available on our investor relations website, investor.progholdings.com. During this call, certain statements we make will be forward-looking, including comments regarding our expectations related to the benefits of our lease decisioning adjustments on delinquencies, write-off levels, and our accounts receivable provision. progressive leasing write-off levels for full year 2022, our ability to convert additional retail partners from our pipeline, the strength of our balance sheet going forward, and our revised 2022 outlook. I want to call your attention to our safe harbor provision for forward-looking statements that can be found at the end of the earnings press release that we issued earlier this morning. That safe harbor provision identifies risks that may cause actual results to differ materially from the expectations discussed in our forward-looking statements. There are additional risks that can be found in our annual report on Form 10-K for the year ended December 31st, 2021, which we encourage you to read. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, and we undertake no obligation to update any such statements. On today's call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP earnings per share, which have been adjusted for certain items which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. With that, I'd like to turn the call over to Steve Michaels, Hogg Holdings President and Chief Executive Officer. Steve?
spk12: Thank you, John, and good morning, everyone. I appreciate your being with us today as we discuss our third quarter results and update you on our business. I'd like to begin by highlighting the progress we have made to mitigate some of the impacts of the significant macroeconomic headwinds we face. I'll start with the actions we have taken to strengthen the quality of our portfolio. As we mentioned last quarter, during Q2, we took decisive, timely action around decisioning to address the trends we saw in the performance of our lease portfolio. The second quarter's write-offs were 9.8%, well above our 6% to 8% targeted annual range, a reflection of the continuing economic pressures being felt by our customers. Our attention to early indicators of payment performance and the decisive steps taken to impact the short duration portfolio have quickly benefited overall portfolio health, as can be seen by the 7.2% write-offs for progressive leasing for Q3 and in the improved profitability from last quarter. Based on the current performance of lease pools originated since our Q2 tightening efforts, we have not found it necessary to do additional tightening. However, We continue to monitor early indicators of pool performance, and we believe that we are still on track to achieve our goal of ending the year with write-offs near the high end of our 6% to 8% targeted annual range. Another item we are controlling tightly are SG&A expenditures, given the top line headwinds. As we mentioned on the Q2 call, we have meaningfully reduced our level of spend. These reductions were aimed at driving efficiencies across the organization and aligning servicing costs with our latest expectations around GMB and revenue. For the third quarter, SG&A as a percent of revenue for progressive leasing was 12.4%, down from Q2 levels of 13%, resulting from our focus on improving efficiency and right-sizing SG&A across the organization. The combination of these improvements in write-offs and the cost reduction actions we have taken where the primary drivers were progressively some strong increase in adjusted income margins from 8.1% in Q2 to 11.3% in Q3. We are pleased that our adjusted income margins in Q3 were more consistent with our historical targeted ranges despite the broad-based inflationary pressures on costs. I would further point out that we achieved these margins while still investing in several key growth initiatives that we believe put us in the best position to capture the unserved market that remains. With respect to progress on our growth initiatives, we've added approximately 60 new e-commerce retailers to our platform year to date, and we remain on pace to add more than a dozen more in the fourth quarter. These new partners will enable us to participate to an even greater degree in the continued expansion of online LTO. Our GMB within the online channel continues to grow versus brick and mortar as e-commerce accounted for 16.5% of total Q3 GME compared to 14.5% for the same period last year. Our technology teams continue to deliver on our promise to develop products that enhance the experience for our retailers and customers. We have collaborated with partners on a number of product innovations designed to increase balance of share while continuing to provide easy integration and interactions for retailers and increase flexibility for customers. Constructive conversations with potential new retail partners are ongoing. We firmly believe that this difficult retail environment is more conducive for us to connect with retailers who we believe can benefit from our flexible payment solution, and we remain optimistic about converting more of our pipeline over the next several years. Our progress on portfolio health, cost structure, and key growth initiatives have mitigated some of the significant headwinds we continue to experience from the macroeconomic backdrop. We saw weak consumer demand during the quarter across most of our retail verticals, including with the majority of our key partners. In our addressable categories, retail traffic remains down, and we saw a number of large partners post double-digit negative comps in these categories. Furthermore, the inflationary pressures being felt across the country are disproportionately impacting our customer, creating softness in overall top-line trends. Despite this, we were able to continue to increase our balance of share with a number of key partners. While these challenges in the operating environment are not exclusive to us, they represent the primary driver for Progressive Leasing's negative 11.3% GMV comp in the period, as the spending of the credit challenge consumer shifts away from our primary categories. GMB was also negatively impacted by our recent tightening of our lease decisioning, as I previously mentioned, and as we discussed on our Q2 call. Finally, as data for upstream credit providers' 2022 origination pools become available, we expect the increases in delinquencies recently reported across most FICO bands to continue. While we have not yet seen meaningful tightening in the credit stack above us, these upstream delinquency increases historically precede such tightening, and we anticipate that ultimately that tightening would lead to the widening of the top of our application funnel that we've been discussing for several quarters. As a result of the continued challenging operating environment, we have lowered our full year 2022 financial outlook, as shown in this morning's earnings press release. As we have stated previously, While not a direct read-through, our GMV production is not immune to the double-digit decline that some of our retailers are experiencing. Nonetheless, we believe our focus on executing on initiatives to increase our balance of share with key retailers, continued technological innovations, and additional pipeline conversions will help us mitigate some of those headwinds in the near and intermediate terms. Looking forward, we expect Q4 will be challenging on the GMV front, and will likely come in similar to Q3's year-over-year percentage decline. We also expect write-offs to remain similar to Q3 levels. Our capital priorities remain unchanged. During the third quarter, we repurchased 588,000 shares and have reduced our outstanding share count by 27% since the beginning of 2021. We ended September with a cash position of $222 million We believe the capital we generate will continue to allow us to reinvest in the business and maintain a strong balance sheet, even with an uncertain economic backdrop. During the quarter, we significantly improved our portfolio health while right-sizing our cost structure and remain focused on technological innovations and pipeline conversions. As we look ahead, we expect to continue managing these areas efficiently and within targeted annual ranges to benefit us as we enter 2023 and going forward. I'll close with emphasizing the strength of our business model. Even in a challenging environment with negative GMV growth, we have demonstrated our ability to manage the portfolio effectively, create efficiencies within our cost structure, and generate significant cash flow in the process. Finally, I want to reiterate my appreciation for the teamwork of all Prague employees as we continue to help consumers and retailers navigate this difficult environment. I'll now turn the call over to Brian for a more detailed look at the quarter's financials.
spk13: Brian?
spk02: Thanks, Dave, and good morning.
spk03: The third quarter's financial results reflect the impact of a challenging operating environment mitigated to a degree by the actions we have taken reducing write-offs and SG&A spend at our progressive leasing segment. During Q3, we saw adjusted EBITDA and adjusted EBITDA margins improve as a result of the actions we took while a challenging retail environment continues to negatively impact top-line metrics. Q3 GMV for the progressive leasing segment was down 11.3% year-over-year, driven primarily by macroeconomic factors, including a double-digit year-over-year decline in addressable categories of many of our retailers and our tighter decisioning, partially offset by increases in our balance of share and many key retail partners. GMV headwinds in the quarter negatively impacted revenue, and we believe will continue to do so in the coming quarters. As we edited the period, our gross least asset balance was up 3.3% year over year, a deceleration from the 12% growth reported for the end of the second quarter, which was primarily driven by the impact of a declining GMV on portfolio size. Progressive leasing revenue was $606.6 million in the quarter compared to $635 million in the year-ago period, a 4.5% decrease. The accounts receivable provision, which is a direct reduction to revenue, remains elevated from historical levels. As you will see today in the company's 10Q, this provision increased to $104.3 million for Q3 of 2022 from $61.5 million for Q3 of 2021. The increase in the AR provision reflects higher delinquencies year over year. However, as the full benefit of our tightening efforts impact our portfolio, we expect to see these delinquencies and AR provision trend closer to pre-pandemic levels. Progressively, Q3 gross margin was 30.3% versus 31.4% in Q3 of 2021, primarily a result of the higher count receivable provision partially offset by lower 90-day buyout activity. SG&A for the Progressive Week of Second was $75.2 million, or 12.4% of revenues, versus $80.2 million, or 12.6% for Q3 of 2021, a decrease of $5 million. This decrease reflects the cost reduction actions we discussed in Q2 as improved efficiencies and an effort to right-size our cost structure resulted in lower SG&A. The rest of the week sees write-offs with 43.5 million and 7.2% of revenues compared to 34.2 million or 5.4% of revenues in the year-ago period, as we continue to compare against the stimulus-dated period last year. Write-offs declined from the 9.8% level we saw in Q2, driven by our tightening efforts last quarter. As we mentioned, our annual target for write-offs is 68%, and we expect a heat be near the high end of this range for the full year of 2022. Adjusted EBITDA for the progressive leasing segment in the third quarter was 68.4 million compared to 88.4 million in the same period of 2021. This decrease is a reflection of the difficult comparison to the stimulus stated period last year and the current macro headlines. I'll note that adjusted EBITDA for the progressive leasing segment improved meaningfully. from $51.2 million in Q2 to $68.4 million in Q3, and margins improved from 8.1% in Q2 to 11.3% in Q3, driven primarily by the improvements in write-offs and SQ&A. Pivoting to consolidated results. Q3 revenue for Prague Holdings was $625.8 million compared to $650.4 million in the year-ago period, a 3.8% decrease. Adjusted EBITDA for Q3 was $65 million or 10.4% of revenues compared to $93.6 million or 14.4% of revenues for the stimulus-aided third quarter last year. We generated $127.4 million of cash from operations in Q3, which is net of the working capital required to fund GMV. As a reminder, we typically have net cash outflows from operations in Q4 period, as a result of the funding, as a result of funding seasonally high GMB. Our Q3 GAAP-eluded EPS was 32 cents, and our non-GAAP EPS came in at 68 cents. We had 600 million of gross debt and 222 million of cash at the end of the third quarter, and a net leverage ratio of 1.49 times trailing 12-month adjusted EBITDA. We also ended the period with $350 million of availability under our undrawn revolving credit facility. During the third quarter, we repurchased $10.9 million of outstanding common stock at an average share price of $18.52. At the quarter's end, we had $373.5 million remaining under our $1 billion share repurchase program. Finally, as Steve mentioned, we have lowered our full year 2022 financial outlook to reflect the challenges we are currently experiencing around the macro environment. Since our Q2 earnings call, our expectations around GMV have been adjusted downward as our customers deal with the impacts of inflation. We also saw weaker than expected customer payment behavior on leases originated prior to our Q2 timing efforts, which is reflected in our provision for accounts receivable. As we enter 2023 and more of the portfolio is concentrated in leases originated after a Q2 tightening, we expect this provision will trend towards pre-pandemic levels. Our updated fiscal year 2022 outlook is as follows. Revenues in the range of $2.58 to $2.59 billion, adjusted EBITDA between $235 and $240 million, and non-GAAP EPS of $2.32 to $2.38. In summary, we're encouraged by the performance of our lease pools originated after the Q2 tightening, which helped deliver the Q3 write-off 7.2%. We're also encouraged by the improvement of our leasing segments adjusted EBITDA margins and expect to see similar benefit in Q4 thanks to the continued hard work and effort of our teams.
spk02: With that, I'll now turn things over to the operator for the Q&A portion of the call. Operator?
spk08: As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Kyle Joseph with Jefferies. Your line is now open.
spk00: Hey, good morning, guys. Thanks for having me on. Just on GMB, obviously, it decelerated quarter on quarter. Just trying to wrap my arms around, you know, how much of that was incremental macro pressure versus underwriting changes. Or I guess another way I could ask would be, you know, what was the date the underwriting changes were specifically made in 2Q and, you know, how much of an impact did they have in 2Q versus 3Q?
spk12: Yeah, Kyle, good morning. This is Steve. So we made underwriting changes throughout Q2. We made some in early May, late May, and then in June again. So it's difficult to parse out the impacts in Q2. Obviously, they were in full effect throughout all of Q3. And as you think about kind of the GMV pressures, it's really two headwinds and a tailwind that have been around all year because we made some other small tweaks to decisioning uh back in you know february march as well so you've got you've got the macro weakness we've seen application volume which is kind of a proxy for um consumer demand in our retail partners be down in the in-store channel um and flat is slightly up in the online channel but because online we have lower approval rates and lower conversion rates due to the you know well-known kind of fraud from an approval rate standpoint, but also lower purchase intent online, losing an app in store has a bigger impact on funded GMV than losing an app online. So it's really been, it's been consumer weakness from an app standpoint, along with our decisioning posture, offset slightly by higher ticket. So we have seen about a four and a half to 5% increase in ticket this year due to basically just inflationary pressures in the retail environment. So as you think about it year to date, it's predominantly consumer weakness and decisioning offset by ticket. Q3 more specifically was probably more than 50% decisioning. Then you had maybe a third-ish from consumer weakness also offset by ticket.
spk00: Okay, got it. Very helpful. And then as you're thinking about, you know, the prospects for a GMB recovery, I know you guys mentioned the supply of credit haven't seen any tightening yet there. But at least more on the demand side, you know, is there, is it just a function of if inflation gets under control? Is it, do we have to lapse some certain comps or do we kind of need to move away from the big product cycles we saw in 2020 and 2021? But just how you're thinking about about potential catalysts for consumer demand to recover?
spk12: Yeah, the demand side is obviously more difficult to predict. There's always going to be a break-fix cycle, but the farther we get away from the nesting and stay-at-home kind of demand pull forward in the high liquidity environment of the pandemic, obviously the better it is for demand. We're certainly not expecting some massive rebound in 2023 from a retail standpoint, you know, depending on what your forecast is for the macro and whether we're going into a recession or not. But we do continue to be encouraged by our ability to execute on certain roadmaps that we have with retailers that can allow us to increase our balances of share even in the face of a Ted Wins from a demand standpoint. And we've done some of those this year. We've talked about them previously, whether it be full e-com integrations or waterfalls in the credit stack or continued marketing or POP in the stores. So it's just, you know, we're certainly facing a difficult retail environment. And as I've said a number of times, it's not a direct read-through to us. because we do have ways to mitigate, but we're not immune to it. So it certainly causes pressures on GMV. And as we said in the prepared remarks, you know, we're expecting a similar result in Q4 just because of all the pressures that we've talked about and the fact that the all-important holiday season is still in front of us, and it remains to be seen how it's going to play out.
spk00: Got it. And then one last one for me. I've followed Progressive for a long time. Obviously, this is probably one of the most or is the most challenging environment I think that the business is faced. But in consideration of that, have you seen any impact on the competitive environment? Obviously, you guys are one of the biggest in the space. I would imagine some of the smaller competitors are feeling the impact even more. And are there any potential opportunities as a result of that in terms of winning partners or partners with competitors, et cetera, how you're thinking about the competitive dynamics given the tough backdrop?
spk12: Yeah, I mean, it is a tough backdrop, but it also gives us a chance to demonstrate the strength of the business model. And one of the things that has shown through this quarter is our ability to control the portfolio, which we've been talking about for a long time and have now proven it. But from a competitive standpoint, from a growth standpoint, I mean, obviously the biggest size of the price for us is still the unserved town. So we're going out there and having fruitful and constructive conversations with retailers that don't have LTO. We obviously are highly focused on taking share from competitors as well and taking advantage of opportunities if somebody either has a funding issue or is not living up to the promise to that retail partner. Um, but as we've said for years, it's a, it's a very choppy competitive environment, especially in the regions. And so, um, it's kind of like two steps forward, one step back in that you'll, you can, you can win a regional player from a competitor, but then you, you know, you turn around and find out that somebody has come in and taken a little bit of business from you in a different one. We're making progress there. We've got a great, uh, regional or SMB team and, uh, they're, they're doing really well out there. And, uh, Progressive continues to show its leadership position in the industry and how we can win. So we're encouraged about our ability to continue to grow that way, which can help mitigate some of the like-for-like or same-store pressures that we're feeling from a GMV standpoint.
spk00: Got it. Thank you very much for answering all my questions.
spk07: Thanks, Kyle.
spk08: Thank you. Our next question comes from Jason Haas with Bank of America. Your line is now open.
spk05: Hey, good morning and thanks for taking my questions. So it looks like from the guidance there's going to be better flow through from GMV into revenue in the fourth quarter. I don't know if that's a reflection of a lower accounts receivable provision or maybe you're just given the decision and it's better quality GMB that you're bringing in, better collectability. I know those are tied together, but just curious if you could talk about that dynamic, and if so, we should continue to see that through the next four quarters or so into next year.
spk03: Yeah, Jason, this is Brian. Yeah, the accounts review provision is a direct reduction to revenue, as I know you understand, and the The dynamics at play or the decision change we made in the first half of the year continue to work their way through. At this point in time, if we think about our count receivable provision, it's still heavily weighted towards the old portfolio, I'll call it, or the pre-2Q originations. And so what's going to happen as that kind of moves towards our new decisioning posture is you are going to see receivable division on a go forward basis. I think you'll see it here in Q4 step down a bit. And so that's part of the dynamic that I think you're seeing.
spk05: Got it. That's great to hear. In terms of the gross margin, I'm calculating it for the progressive leasing segment. And we're still running quite a bit. I think it's maybe, I don't know, 200 bits or so below what you were doing in 2019. So I was curious if you could talk about why that gross margin is lower? I don't know if it's a function of the environment's more competitive. Are you shifting to large national retailers that maybe have a different pricing structure? And is it possible that we could get back to more like 2019 levels, or is this the right run rate to use going forward?
spk03: Yeah, I would say at the top of the list of factors impacting that gross margin is is this accounts receivable division uh you've seen how much it's it's increased from a year-over-year perspective it's up i think roughly 43 million dollars a year over year from an absolute dollars perspective is a percentage of call it uh you know gross revenue before that provision it's uh well elevated from historical levels so i think the key to getting back to gross margins that are familiar uh pre-pandemic it's it's going to be seeing that accounts receivable provision come down that's going to be a function of continuing to see delinquencies come down and and that's the i think the path forward you the next the next biggest drivers are just what's happening from a disposition standpoint and we actually saw 90 days come down a little bit year over years we just were caught against a highly liquid uh simulated period last year and so that's actually working as a tailwind so there's not been there's not been significant of retailers, retail behaviors that will rise to the top of the list are the biggest factors. We need to turn over the accounts receivable dynamic, and we expect that'll move to a more favorable spot starting here in Q4, and we'll work to make that continue.
spk13: That's great. Thank you. Thank you.
spk08: Our next question comes from Anthony Chukumba with Loop Capital. Your line is now open.
spk01: Good morning. Thanks for taking my questions. So as I look at your revised guidance, so you brought down the midpoint of revenues by about 2%, but you brought down the midpoint of your EBITDA guidance by about 10%. And if I look at the sort of implied EBITDA margin, it goes from like 10% to 9.2% at the midpoint. So I guess I was just wondering, you know, what accounts for that, particularly given the fact that you said you're taking costs out and it sounds like the leased merchandise write-off rate has stabilized. So I guess that was my first question.
spk03: Yeah, there's a few moving parts that I'll just offer. I think you think about a Q4 period, you do have the highest GMV generation expected. With that, you've got some variable costs and transaction related costs that flow through. So the GMV isn't going to immediately translate to revenue. So that's probably the biggest piece I'd point you to. I would just expect while we made a a ton of progress here in Q3 on SG&A. I'm proud about where we've been from an execution standpoint on that cost reduction plan. 12.4 is a number that, you know, is more reflective of where we were at before we became a public company in 2019. And so we've done a lot of work there, but there's still going to be, I expect, a take-up probably in SG&A into Q4. with just those transaction-related costs with a higher GMV volume coming in in Q4 than we expect relative to Q3, and that's going to put a little bit of pressure as our expectation.
spk01: Got it. That's helpful. And then, you know, you talked about the fact that, you know, there's obviously a lot of weakness with your retail partners, and, you know, that's consistent, obviously, with, you know, what we're seeing out there. But I guess that, you know, the sort of you know, it's a double-edged sword, right? Because I think that would help you from a retail partner pipeline perspective. So I was just wondering if you could give us any update in terms of your retail partner pipeline.
spk12: Yeah, you're right. You know, in a tough retail environment, Anthony, that's when, you know, our offering of having a fully developed finance pack in all retail should – should be more acceptable and more conducive for those sales. So we're having, you know, we don't obviously talk about specific names in the pipeline, but this is the environment where we think that we have the ability to make hay. Obviously, we're right upon code freezes for retailers for the holiday season, so it doesn't go quiet because we're still having great conversations, but we're not really actively with hands on keyboards, but But it is a big opportunity for us over the next one to three years to convert the pipeline, and we're encouraged about our ability to continue to do that.
spk01: Got it. That's very helpful. Thank you.
spk13: Thank you, Anthony.
spk08: Thank you. Our next question comes from Brad Thomas with KeyBank. Your line is now open.
spk06: Hi, good morning. Thanks for taking my questions. First, just with respect to the current underwriting and decisioning levels, I was hoping for just perhaps a little bit more perspective on where you are from a historic perspective. Obviously, you did some tightening in 2Q, but can you help give us some context for, if you look back over maybe the last 10 years, where you stand on a kind of looser versus tighter perspective?
spk12: I mean, 10 years is a long time, and there's been just kind of massive changes to our decision sophistication over that time, and there's been channel shift, right? So what I'll say is I'll give you absolute approval rates, changes like I did last quarter. So we're actually fairly flat when you talk about year-to-date. So we're down 200 BIFs year-to-date. for 22 versus 21 but only about a hundred uh down 100 from versus 2019 kind of pre-pandemic now if you're talking about just Q3 after we did the the decisioning changes uh the material decision changes in Q2 but we're down 750 or so 800 basis points from 2021. obviously 2021 was elevated approval rates because of the payment performance and the stimulus-aided just environment we were in. But we're down about 225 basis points from 2019. Now, these are weighted approval rates, weighted by channel. So if you were to normalize for channel, and there's a pretty material difference between approval rates online versus approval rates in-store, Not to mention the conversion rates. But if you're normalized by channel back in 2019, we're fairly consistent with 2019 approval rates if the apps were coming from the same channel. If you go back previous to 19, you know, back to kind of the 15 to 18 period, I don't have the data in front of me, but I would say approval rates are probably higher just because we've found ways through our decisioning models to mine for those next approvals that can be profitable for us.
spk06: That's really helpful perspective, Steve. Thank you. And then I was hoping to ask a question just about EBITDA margins and, you know, maybe some initial thoughts as you think of 2023. You know, our view on progressive is that, you know, you've got tremendous opportunity to be a highly profitable business. And a lot of that just comes with getting your underwriting aligned with, you know, the kind of consumer backdrop that you're a part of. And obviously you've taken a lot of that medicine earlier this year. You know, we're also seeing a difficult retail environment though. And, and so I guess as you think out to next year, can you help us think about that? Those elements of, you know, getting the underwriting more aligned with how the consumer actually is able to pay and coupled with the level of investment that you think is warranted in the business in this perhaps more challenging environment and your optimism for margins for next year? Thanks.
spk11: Yeah.
spk12: I mean, from the underwriting standpoint, I mean, if you look at the pools originated post kind of June 30 or July 1, I mean, we're where we expect to be or want to be with our historical, you know, six-plus year, 68% targeted annual range from a loss standpoint. Obviously, we're continuing to watch it. And, you know, if unemployment starts to pick up, you know, if we need to make or find it necessary to make additional decisioning changes, we will do that. And as you have seen, they can have fairly quick impacts on the portfolio. So as we flip the calendar page, the end of 2023, the portfolio will be a heavy majority comprised of leases originated post 7-1 of 22. It won't be fully there, but it'll be almost there. So as we think about the portfolio performance and portfolio health going into 23, we feel good about where we are. clearly a risk is further deterioration in the economy and potential unemployment. Although I would say that as a green sheet to that, that usually and should result in the credit stack above us tightening, as we've all been kind of predicting and waiting for for several quarters, that should open up the top of the application funnel for us, which can bring in, you know, on average better quality applicants into our funnel without us even making any decision changes. So to repeat or in summary, the portfolio is in good shape moving forward for the leases post 7-1. And we have not found the need based on our weekly and daily monitoring to make additional changes since then. But we stand ready to do it if it's necessary. So from a health standpoint, that'll be a tailwind for us for 2023, just because we won't be having these higher write-offs and higher bad debt expense or lease or AR provisioning expense from a, you know, we talked about pipeline, so that's an encouragement. I'm not sure how much of an impact that will have in actual 2023 GMV, but it could impact future years. And then, you know, From a growth standpoint, we look to be able to continue our productivity within our existing doors and hopefully add some more. But you mentioned it's a profitable business. It is a profitable business. It's maybe less profitable this year than it has been historically, but it's a profitable business that generates a significant amount of cash flow in all cycles. And once we see that widening at the top of the funnel, that'll be a removal of a headwind and hopefully a decent-sized tailwind for us to continue to deliver those historical margins and dollars.
spk13: Great. Thanks very much, Steve.
spk08: Thank you. Our next question comes from Bobby Griffin with Raymond James. Your line is now open.
spk04: Good morning, buddy. Thanks for taking my questions. First, I wanted to circle back just on the OpEx side of the business. Steve or Ryan, has the fixed variable nature of this business changed over like the last 12 or 18 months with some of the investments? I'm just trying to kind of connect the dots of if GMB is down again in And 4Q, you know, why aren't we seeing OpEx kind of flex down with, you know, lower transactions or, you know, anything like that versus tick up as your earlier comments said sequentially?
spk03: Yeah, just to add some color there. The tick up is from a Q3 to a Q4 commentary. There's, and that's not unusual when you look at seasonality historically. You've got a, You've got a higher GMV. Q4 is your highest GMV generative period. And so that's going to step up from Q3 is our expectations. And so that's going to be part of the cost driver. The fixed variable nature of the business has largely remained unchanged over the years. Obviously, we have some public company costs that we layered on post-split. You know, those aren't a, you know, probably the range is $10 to $15 million of our total spend. But generally speaking, we remain a very highly variable cost structure. And that's why we were able to, we don't have long-term fixed obligations that kind of saddle us for multiple years. That's why we were able to quickly uh demonstrate the improvement in sgna in the q3 time frame uh from last quarter as steve mentioned this prepared remarks and so i it's one of those things that what gmv you're going to see you're going to see some gmv moves uh sequentially from a from a quarter of a quarter standpoint you'll see sgna move but it still remains largely within our control on a go-forward basis and so steve comments about margins and our ability to maintain margins That's part of the strength of the model is our continued control over that. So it was really commentary on just the expectation that SD&A as a percentage of revenue is generally higher in Q4, and that's what I'd expect to see here, especially given kind of the way we're scheduling out GMB.
spk04: Okay, so maybe take it a step further. I mean, like, if you back out the restructuring, you back out impairment, we're looking at maybe roughly $100 million in SD&A this quarter, right? you know, XDNA. So, like, if we have a couple more quarters and we go into 2023 and the GMV stays pressure, we will see that $100 million flex down in dollar terms? Or is there, like, you know, a level of investments that's going in there that we're not seeing the flex down in dollar terms? So, that's where, I mean, it just kind of looks like it's holding roughly at $100-ish million or maybe ticking up.
spk03: Yeah, without getting... too much color into 2023. I guess I would say that generally I'd expect kind of Q1 SCNA dollars or percentage to, you know, as a percentage of revenue to relieve a bit from Q4 levels. But again, we're not committing to any 2023 metrics just yet. There's an ongoing planning cycle, but I think you're thinking about it right. You generally have just a a bit of a take-up here in the HQ4.
spk04: Okay, that's awesome. I appreciate the details. That was it for my questions. Thanks for all the details today. Best of luck.
spk13: Thank you.
spk08: Our next question comes from Vincent Cantech with Stevens. Your line is now open.
spk10: Hey, good morning. Thanks for taking my questions. Just two follow ups on earlier questions. So first on the write off rates, it was very nice to see the write off rates decline quarter to quarter, and I think you're the only one of the least owned guys to show that good result. So from the adjustments, the tightening that was made in the second quarter, is there still more room for that write off rate to decline? So we haven't seen all the improvement yet in the third quarter. then if you could maybe talk about you know the tightening that you've done what sort of um macro backdrop is is built into that or said another way like what what would it take uh in order for that write-off grade to potentially perhaps get worse yeah um i'll start this is steve and brian can chime in but um you know the way that the portfolio works there's two different dynamics when it comes to portfolio performance and one is the
spk12: the write-offs, which is our publicly reported metric. And that one moves more quickly because it's based on the book value of the inventory that we have out on lease. And then there's the AR provision, which is also a publicly reported metric. But that takes a little bit longer to move through the system. So from a write-off standpoint, the post 7-1 lease originations are more of a story in Q3 than on the AR side. They will continue to become the story in Q4. But as we said in our prepared remarks, we're expecting write-offs in Q4 to be in the same neighborhood, similar range to Q3. And our goal from an annual standpoint is 68%. So we're not actually trying to drive write-offs down to five or even where they were That's probably too tight of a posture. So we're expecting similar results in Q4, which we think will get us near the high end of our 6% to 8% annual range, which we're proud of, especially given the impact of earlier this year's performance on the portfolio. What's built in is we're basically tracking all of our early indicators, whether it be first pay bounds or delinquencies or any of the other indicators that we have against our pre-pandemic pools. Because I don't remember the exact numbers in 18 and 19, but we delivered somewhere in the low sevens of write-offs in those years. And so that's kind of down the middle of the fairway. of our 68% range, and if we can track on a weekly basis the same results as the pool matures, then we feel good about our ability to deliver those results. What's baked into it is kind of like the current economic backdrop, the inflation, the stressors on our consumer. What's not baked into it is some material shift up in unemployment. You know, and the unemployment is also an interesting dynamic, right? Because I expect unemployment to go up, but what are you hearing out there as far as layoffs? It's mostly in, you know, engineers and tech in Silicon Valley. It's not necessarily in hourly service workers and manufacturing. Now, that may come, and we're braced for that, and we have our hands on the wheel to make adjustments, but There still seems to be a shortage in those workers, and there'd have to be a decent amount of demand destruction in order for there to be material weakness in that end of the employment curve. Not saying it's not going to happen, but I'm saying that we're looking for it and brace for it and can make adjustments. So we're tracking towards pre-pandemic. That's our kind of guidepost, and we're feeling really good about where we are on the pools originated after COVID. After 7-1. Okay, great.
spk10: That's a lot of helpful detail. And then follow-up. So great to hear that merchant engagement is increasing. Just wondering if you could update us on sort of the discussions you're having in terms of the merchants that you are winning, and you've won 60 so far and another 12 this quarter. If there's any sort of like industries or bands that you're getting particular success with, And then as we think about the fourth quarter and the holiday selling season, what sort of engagement are you getting in terms of marketing and promotion activity with the merchant? Thank you.
spk12: Yeah, so on the e-com, I mean, we're excited about our e-com activities. And, you know, if we had 75 or, you know, are so new retailers in 2022. We think that's a successful year. These are on the smaller side, obviously. They're not going to materially move the GMV, but they help us. If it's an e-tail only retailer, that's great. If it's an e-com flow for a brick and mortar retailer that we already serve, that helps us broaden and deepen the relationship. So we're pleased and excited with that progress. um and as it relates to the fourth quarter on larger merchants as i mentioned mostly we have code freezes but um we're you know as far as industries there's there's a lot of uh opportunity for us right down i guess industry's not the right word let's call it categories or verticals there's a lot of it uh opportunity for us right down the middle of the fairway we'll look um to expand a little bit here and there if it's um if it fits that mold of a bigger ticket item for a consumer. And we're definitely having conversations in that regard as well. As it relates to the fourth quarter marketing, the holiday season is going to be an interesting one. We're hearing from some of our retailers that they expect it to be a late developing holiday season. And I guess the consumer has a lot of power in that because if the consumer says, hey, I'm going to sit on my hands and wait, because I think there's going to be promotional activity or markdowns, then just the fact of them waiting kind of causes the retailers to get concerned and create markdowns and promotional activity. So we're expecting kind of the period on and around Black Friday through Christmas to be more heavily weighted than maybe even it is in normal years. But in preparation for that, we've got a number of things that we're doing. Frog Partner Week, with our retailers, co-branded marketing campaigns, daily deals in that partner week. We've also got a retailer adopting point of purchase material for the first time since we've been with them. So we're pleased with the fact that our retailers are trusting us and reaching out to us and collaborating with us on how to you know, how to make the most out of our programs.
spk13: Okay, perfect. A lot of helpful detail. Thanks very much.
spk08: Thank you. Our next question comes from Hal Goetsch with Loop Capital. Your line is now open.
spk09: Hey, thanks, guys. I got a question on, you know, the retailers that you've added, maybe by, not by name, but by cohort or the year they were added. And I was It's a mix of brick and mortar. It's a mix of e-commerce. You mostly mentioned the e-commerce merchants you've added for the year. And then you've also said later on the call that, you know, they have lower approval rates and generally lower, you know, lower take rates because of the quality is not as good. But, you know, could you show us some ideas on like the retailers that you added in 2018, 19, 20, 21? Like we're, Were the cohorts that were added to me during the pandemic, did they come on at much higher productivity levels than normal and we're seeing that fall? Like, you know, how are the cohorts of by year they're added acting if you do that kind of analysis? Because it seems like you're adding merchants, you know, every year, every quarter, GMV's down because of, you know, and we're just trying to figure out, like, hey, when things bottom up, you know, you're going to have at the next upturn, you'll have more merchants doing more business and you'll come, you know, come out of this as a growth cyclical, not just, you know, stay flattish here. Thanks.
spk12: Yeah, well, I'll try to tackle that one. And I'll start with the last part of your comment. I mean, that's certainly our base case and our expectation that the broader we can widen the base, the more retailers and customers that we can add will create a better springboard, if you will, for when retail environment picks up and have that inflection point on growth. Reverting back to the earlier part of the question, it's difficult to say. I mean, you know, 2019 obviously was a banner year for us. That's when we added Best Buy and Lowe's. We didn't like ramp. So 2019 was a good year, but we didn't ramp productivity significantly. faster than we otherwise would have during the pandemic, because we actually felt like during the pandemic, we had a headwind on GMV production because customers had so much cash, they didn't rely on flexible payment options as much. They just paid cash at the point of sale. So it kind of was a COVID pause, if you will. We did fine and we grew with those retailers, but I think all things being equal, if we hadn't had COVID, we'd be farther along with those retailers than we are now. And then as it relates to, you know, I don't want to make it sound like I'm not interested in online applications because online applications, you can get them very quickly and they can be, you know, millions of applications. And in-store, while they do have higher approval rates and higher conversion rates, you know, it's a numbers game. So even with the lower approval rates and the conversion rates, you know, the numbers can swamp the in-store over time as we broaden our base of e-commerce and e-tailers, as well as our interaction with our own digital platforms as it relates to Prague Leasing.com and the Prague app. So, you know, there is channel shifts. We expect to continue channel shifts, not only from the application side, but also from the So the GMV side, we talked about growth there up to 16.5% of our GMV was from the e-comm channel. So we expect that to continue. It's just difficult to kind of go back to 17, 18, 19 and say what, you know, what happened and what will happen. But I would just end with that is our goal and our objective is to get as many retailers as we can. even while retail business is soft, such that when we get into the next replacement cycle and get that inflection point up, we're starting from a much larger base.
spk09: Okay. You would say, though, then, that the credit performance is a pretty big contributor to your earnings surge in late 2020 and 2021, then? That's right. Yeah, performance.
spk12: Absolutely. Yeah, absolutely. I mean, you know, we've been targeting that 11% and 13% adjusted EBITDA margin for a number of years. And, you know, when the payment performance because of all the stimulus came through in 2021, we had write-offs down in the 2% and 3% and 4%. And We were very clear that we were over-earning the model, at least in the growth phase that we expect that we're in. 14% to 16% EBITDA margins was an out-of-target what we executed on. We expect to get back towards those ranges. This year has been a reset in the opposite direction.
spk09: My last question is, would you say that, you know, with the credit underwriting you've done today, the last time in Q2, and the performance you just put up in Q3, and the speed at which the book turns over, would you say you're pretty set up to be in that 79% range going forward from here?
spk02: Are you talking about the write-off range, the 68% write-off range? Yeah, it's the write-off range, yeah. Yeah. Yeah, I mean, of course.
spk12: Yeah, I think we feel good about where we are. I think we've proven and demonstrated our ability to influence the portfolio very quickly. And as the months turn and we turn into 23 and the portfolio is comprised of pools originated after the tightening, we would expect it to deliver performance within those ranges.
spk09: Yes. All right. Thank you very much. Thank you.
spk08: That concludes today's question and answer session. I will now turn the call over to Steve Michaels for closing remarks. Steve?
spk12: Thank you everyone for joining us today. We appreciate your continued interest in Prague. I just want to thank the team for really executing in a very difficult environment. Our goal is to you know, to make things easy for our retailers and our consumers, and we continue to do that. And in this time and this choppy environment is when we become more important to both of those. So we look forward to continuing to deliver on that promise. Look forward to updating you next quarter.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer