FlexShopper Inc (FPAY) 2019 Q3 法說會逐字稿

Greetings and welcome to the FlexShopper Third Quarter 2019 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jeremy Hellman of The Equity Group.

Thank you, sir.

You may begin.

Thank you, operator.

I would like to remind everyone that we have posted an updated investor presentation within the IR section of the company website, www.flexshopper.com, and I encourage everyone to review the forward-looking statement on Page 2 of that presentation.

With that, I would like to turn the call over to FlexShopper's Founder and President, Brad Bernstein.

Please go ahead, Brad.

Thank you, Jeremy, and welcome, everyone, to our 2019 third quarter earnings call.

Joining me today are Rich House, our new CEO; and Russ Heiser, our CFO.

I want to take this opportunity to formally introduce Rich to all of our investors and analysts.

Rich came aboard a month ago, and it is a great addition to our executive team.

With our B2B retail channel kicking in, our surpassing a critical inflection point in lease originations and our continued significant growth, the company recognized that the executive leadership team needed additional bench strength.

Rich brings significant knowledge and experience in the consumer credit arena, and I look forward to working with him as we continue to grow our company.

Now on to the highlights from Q3.

In short, our third quarter was a solid continuation of the excellent momentum recorded throughout the first half of the year.

We continue to originate leases at a robust rate, with net lease revenues following net growth as everyone familiar with our model might expect.

We've coupled that top line growth with excellent margin performance in the quarter, resulting in another quarter of positive earnings of $800,000 or $0.02 per share.

That also translated into adjusted EBITDA of $3.2 million for the third quarter and $7.2 million for the 9-month period.

Both of those figures are ahead of our expectations and guidance as our B2B retail channel's lease performance positively impacted our lease portfolio performance and overall company performance.

We originated 38% more leases in the third quarter of 2019 by gross origination dollars for the same quarter last year.

Driving that growth was a combination of repeat customers along with new customers, particularly through our B2B partners.

For the trailing 12 months ended September 30, 2019, our B2B retail channel contributed approximately 33% of all lease originations compared to approximately 10% in the same period a year ago.

During the third quarter, we again lowered our average cost to acquire a customer to $67 from the prior year when it was $133.

Our overall acquisition costs continue to benefit from the growth in our B2B retail channel, which is a great source of lower acquisition cost customers for FlexShopper.

Repeat customers represented approximately 40% of lease originations in Q3 2019.

This also helps drive down our customer acquisition costs, while providing strong validation of the value we bring to our consumers.

As we mentioned on prior calls, we are very focused on capitalizing on our B2B retail momentum.

We're confident that our successful track record, integration-less retail approach with immediate payment at the point-of-sale and formal B2B marketing efforts made by our experienced business development team will pay significant dividends.

I'm now going to hand the call over to Russ Heiser, our CFO, to discuss our financial performance and provide an update on our 2019 outlook.

Then Rich will conclude with our prepared remarks with some final commentary before we open the call for questions.

Thanks, Brad.

We have a number of new investors joining us this morning, so I want to mention to them that I've spent the last few calls walking through revenue recognition changes and explanations around both the seasonality and forecasting originations in our online channel.

So please review those transcripts regarding those topics.

However, I do want to take a moment to reiterate the impact of the B2B channel on our current business.

As Brad mentioned, the B2B channel, in which we primarily provide lease-to-own offerings through retail partners has grown rapidly this year.

In fact, in the third quarter, it represented the majority of our new customers.

Given the high growth in this relatively new channel, we are still taking a very conservative position when it comes to our projections on revenue, gross profit and EBITDA until we have gathered sufficient data on the longer-term origination and repeat rates as well as the lease performance in this part of our business.

I also want to take a minute to highlight a few comparative results.

In the first 9 months of this year versus the first 9 months of 2018, gross lease originations, which are what drive subsequent year or next year's revenue growth, increased $13.9 million, an increase of 45%.

Net lease revenues and fees rose 52.7% to $64 million.

This is even higher than our origination growth from the first 9 months of last year of approximately 47%.

Gross profit increased 64.5% to $21 million from $12.8 million as the company continues to fine-tune underwriting to deliver even better results.

And adjusted EBITDA grew to $7.2 million compared to negative $2.3 million as the benefits of the scalable business model continue to be realized.

This resulted in net income of $1.6 million compared to a loss of $7 million.

For the third quarter of this year versus the same quarter of 2018, I primarily want to highlight the gross profit margin driving the period's improved performance.

This can be seen in the key performance metrics section of the MD&A in the 10-Q, where we generated a 37% gross profit margin versus 30% last year.

Those of you that have followed FlexShopper know that our gross margins have tended to be pretty stable in the low 30%.

The biggest factor in our improved gross margin was a lower delinquency rate and leases we have originated through our retail partners.

I will now move on to discuss changes to management's guidance.

As shown in our press release, we are again increasing guidance and now expect gross revenue of greater than $115 million, adjusted gross profit greater than $27.5 million, adjusted EBITDA greater than $8 million and gross originations of greater than $72 million.

Here is Rich for some final thoughts.

Thanks, Russ, and thanks, Brad, for that nice introduction.

It's been exciting for me this month coming in and merge myself in these operations.

Great group of people here.

And I want to applaud Brad for his leadership in building FlexShopper to where it is today.

As our third quarter results show, our business has passed an inflection point.

And we look ahead to the holiday shopping season and into 2020.

My main priority is centering our business with a very disciplined focus on return on capital.

Over the past 5 years, FlexShopper has established itself as a market leader in the virtual lease-to-own space.

Going forward, we'll look to leverage that leadership, and you can expect us -- from me to emphasize bottom line profitability in the form of return on capital as an enduring business objective.

Simply put, it's not enough to just put leases on the books.

What we're targeting is the intersection where we originate the maximum number of leases, but also provide an expected positive and incremental return on our investment and shareholder capital.

And over time, we'll share more detail around those metrics.

And with that, we'd be happy to take any of your questions.

(Operator Instructions) Our first question comes from [Aaron Frost] with [Money Team Investments].

First of all, congratulations on the blowout quarter.

And my question is, how are you able to cut the costs to acquire a new customer in half?

And what do you project it will be next year?

Yes.

So I'll start with that one.

And [Aaron], thank you for the kind words.

So for those of you that have been following our model and our history, you can clearly see that year-over-year we have gained a lot of experience and sophistication in terms of optimizing and lowering our acquisition cost, primarily through digital online methods.

But what you're also seeing contributing in the last 18 months is the impact of lower acquisition cost B2B retail sales, which obviously have a powerful influence on that.

So we're really proud of what we achieved just in terms of optimizing our online direct-to-consumer channel, but at the same time, we're also really proud that we've got our B2B channel kicking in, which is a lower acquisition channel.

You could see in the third quarter, our customer acquisition cost was at a long-time low.

How low that gets, we haven't really given any guidance on where -- how low that can get.

(Operator Instructions) Our next question comes from the line of Richard Deutsch with National Securities.

Richard, welcome to the team.

We're very excited, bringing on your experience and help you accelerate the growth into the future.

Brad, sterling quarter, just absolutely outstanding and even shocking for somebody that follows the company so closely.

Could you give us a little detail, though, on the explosive growth on B2B?

Having not seen any announcements of any new chains coming onboard.

Can you give us a little color on exactly where that growth came from and what's in the tank right now?

By the way, thank you, Rick, for your kind words, too.

I think the best way to look at it is -- that's what your -- what's being experienced in our performance and the numbers is the maturity of a lot of our retail wins that occurred this year.

Let me also just say that we feel very strongly about the pipeline.

In fact, we were continuing to make investments in our business development team.

We have had some new hires in the third quarter because, obviously, we recognize the opportunity, and we feel very confident about capitalizing on it.

But to answer your question best, not only do we feel good about the prospects in the pipeline and it's going to pay dividends, but what you're seeing is in maturity and optimization that's occurring in what we've acquired.

So it's just not only adding these accounts but it's actually executing properly.

And what you're seeing is the fulfillment of fantastic execution by our team in the field.

And I can tell you that the stores that we have put on, from the time we put them on to today, they continue to grow for us, and that is a true partnership between us and our retail partners and the fact that we're executing in a very sound fashion.

And obviously, most importantly, that is reflected in our portfolio performance and the bottom line performance of the company.

So let me add to that, we absolutely see the opportunity.

As I -- we've always said, when it comes to B2B, some of these things come on fast, some of them come on slow.

But I will continue to say, our pipeline is healthy, and we're confident that it'll pay dividends.

So Brad, are you saying that your existing customers that came on early are just continuing to do better as opposed to adding on a lot more doors?

Is that what you're saying?

I'm saying we added on -- in the second quarter, we added on probably another 400 doors.

They hadn't reached optimization or maturity yet.

Those were an additional 400-plus stores, right?

So now not only have they all been rolled out for a couple of months, but we continue to execute and get more out of those stores in the partnership.

And we continue to add doors.

Have we announced another couple of hundred store rollout?

No.

But as I continue to say, that doesn't mean that it's not in the pipeline, and we feel very confident in that.

Again, some of these retail wins happen fast and some of them are more slowly and premeditated.

But -- and we continue to make investments.

Obviously, we feel we have a great model, and that's what's getting traction.

So we're continuing to make investments in our direct to business and business development pipeline, and also continuing to optimize what we have.

All right.

Well, that's real helpful.

It answers that big question mark on your giant increase in margins and customer acquisition costs.

So I'm going to use my follow-up question.

For the other part of your business, you've got the customers, you've got the businesses, but then you put on a payment option.

And if I recall last quarter, the checkout payment option for FlexShopper was about 10% of your revenues.

Can you give us a little color on what your experience is?

What you expect to -- what's happening there?

Because that is also another extremely exciting low customer cost acquisition, a high-margin business.

Rick, it's incredibly exciting, and we actually have very focused, targeted campaigns to third-party e-commerce companies that use our payment method.

And we're going after those every day.

Now when you look at the 10% as a mix of our whole business, it's 10% of a larger number, so that business is growing also.

So obviously, 10% of a smaller number is a smaller number than 10% of a larger number.

So -- but obviously, our mix of business is getting healthy in terms of more retail and also a healthy amount of direct-to-consumer and repeat business from there also.

So I haven't looked at your new presentation, but the payment options -- I would just guess, but that may be the lowest customer acquisition costs.

Can you compare customer acquisition cost through that as opposed to B2B?

Well, that is a B2B channel because it's on a third-party e-commerce site.

But I would say that a third-party e-commerce site has the lowest acquisition cost, retail in the store the second lowest, and then obviously comes our direct-to-consumer.

But -- Rick, I'm glad you asked the question because you're touching on all of our channels, and that is what really makes us unique as a company.

We are the omni-channel virtual lease-to-own company.

We've got our marketplace direct-to-consumer.

Our in-store, obviously, which in the last 18 months has really taken off.

And then we've got a payment method, a checkout on a lease-to-own basis, which we do have patents on for third-party e-commerce sites.

So thank you for bringing that up, so I could refresh everyone that we are the only pure omni-channel virtual lease-to-own player.

And I just want to end my comments by repeating something you mentioned to me early on that getting people to use your system in the first place is really, really hard.

After their experience in saving the sale and increasing their revenues, it's hard not to get new customers.

So congratulations.

I look forward to following you and Richard's progress going forward.

Thanks, Rick.

(Operator Instructions) Our next question comes from Gustavo Rodrigo with Westpark Capital.

Congratulations on a wonderful quarter.

My question is in regards to your outstanding share model.

There's been some chatter as of recent as far as the warrants are concerned.

Do you guys have the ability to call those at any point that you wish?

No, the warrants are not callable.

Okay.

And it looks like you guys are down to about $3 million in cash, is that correct?

$3 million in cash on the balance sheet, but there's availability under our credit facility, additional availability.

Up to what?

We have about $2 million right now.

Okay.

Wonderful, wonderful.

Okay.

Do you guys see any -- I mean, obviously, you're not going to talk about it, but do you see any need to raise any additional capital going forward in the future?

Our plan, as we've mentioned in the past, is to continue to not look towards equity capital anytime soon.

Perfect.

All right.

Congratulations, again, on a fantastic quarter.

Thank you.

Thank you.

Our next question comes from Theodore O'Neill with Litchfield Health Research.

It's Ascendiant Capital Markets.

Congratulations on the good quarter.

And I was wondering if you could give us some insight into sort of products or what segment is driving most of your lease originations right now?

Well, we haven't disclosed that.

As you know, we have made -- we haven't disclosed the mix, but we certainly have made headway in the -- on the tire side.

And at the end of the day, the in-store model, whether it's furniture, tires or anything else is -- the performance curves are better than online.

And that's what you're seeing in the numbers.

(Operator Instructions) It appears we have no additional questions at this time, so I'd like to pass the floor back over to Mr. House for any additional concluding comments.

Well, thank you, everyone, for joining us.

And we look forward to continuing this successful run that Brad and Russ have started.

And I look forward to meeting some of you investors in the near future.

Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference.

Again, we thank you for your participation, and you may disconnect your lines at this time.