FlexShopper Inc (FPAY) 2019 Q4 法說會逐字稿

Greetings.

Welcome to the FlexShopper Fourth Quarter and Full Year 2019 Earnings Call.

(Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Jeremy Hellman of The Equity Group.

Please go ahead.

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 encourage everyone to review the forward-looking statement on Page 2 of that presentation.

With that, I would like to turn over to FlexShopper's CEO, Rich House.

Please go ahead, Rich.

Thank you, Jeremy, and welcome, everyone, to our 2019 fourth quarter and full year earnings call.

Joining me today is Russ Heiser, our CFO; and Brad Bernstein, the Founder and President of FlexShopper.

Russ is going to walk you through the results of our business and provide some forward-looking guidance.

And Brad is going to provide you an update of our business-to-business partnership operations.

And I'll finally conclude with an update on our consumer operations and a view of our strategy moving forward.

So I want now to hand over the call to Russ now for financial highlights.

Thanks, Rich.

A press release and investor deck provides significant detail on both the fourth quarter and full year.

So I'll focus on a few high-level metrics, recent events and the new guidance.

Overall, 2019 was a great year for FlexShopper.

The financials reflected that with significant improvements across the board, highlighted by $11.4 million increase in EBITDA, increasing $8.3 million in 2019 versus negative $3.1 million in 2018.

Moreover, we finished 2019 with $800,000 in pretax earnings, a $10.3 million improvement over 2018.

Given that those improvements were realized on just a $27 million increase in net revenue over the period speaks to the significant operating leverage in the business as we continue to grow.

This was driven partly by refocusing on leases that were hitting or exceeding our target IRRs for both the B2C and B2B segments.

So while B2C lease originations and new lease dollars were down about 30% in the fourth quarter versus the prior year, the B2B business was up approximately 90%.

In terms of the metrics we typically highlight for the year, our average origination value per lease improved from $416 in 2018 to $452 in 2019.

At the same time, we're able to reduce our average customer acquisition costs from $135 to $80 per lease.

A significant part of these improvements were driven by the growth of our B2B channel.

In terms of our balance sheet, I want to reaffirm that the combination of our operating cash flow and the existing credit facility provide us ample liquidity with which to operate our business.

In fact, in addition to the cash on our balance sheet at year-end, we had approximately $2 million of availability under our credit agreements.

In terms of recent events, we recently finished a warrant tender offer, which was a first step in improving our balance sheet.

Our public warrants no longer trade and all 5.75 million of our public warrants have been or will shortly be retired in exchange for approximately 3.5 million common shares.

We think this not only reduces the overhang of a significant number of shares having to be issued in the future, but we believe it also was responsible for the reduction in short interest from over 600,000 shares in December to approximately 30,000 shares currently.

Moving on to 2020 guidance, I want to make a few points.

The first is that we're taking a similar approach to last year.

We are basing guidance on what we are seeing in the business today, and we'll adjust guidance up as new initiatives gain traction.

As a reminder, last year, our guidance, especially EBITDA guidance, moved up substantially over the course of the year after we took a conservative position in the first quarter.

Next, I want to point out that GAAP reporting has changed, so lease revenue for guidance purposes will now be net of bad debt expense in line with our financials.

It will no longer be based upon gross revenue.

In fact, a number of investors have reached out this morning to confirm that our revenue guidance for 2019 of $115 million needs to be compared not to net revenue on our income statement, but the over $120 million found in the MDA section of our 10-K on Page 21.

Let me also remind listeners that revenue and thus gross profit is primarily a trailing metric for our business, our originations from last year drive this year's revenue.

Finally, please note that our quarter-to-quarter performance is not smooth.

Our seasonality in originations and in marketing spend produces significant quarterly fluctuations.

With that, as shown in the press release, available on flexshopper.com and in the investor presentation, we are setting guidance as follows: gross originations of greater than $82 million, net revenue greater than $100 million, gross profit greater than $35 million and adjusted EBITDA of greater than $11 million.

Now I'll hand it to Brad to go into more detail on the B2B business.

Thank you, Russ.

And as we all know, 2019 was a great year for B2B growth, as Russ commented, up 90% in the fourth quarter year-over-year.

And of course, going into 2020, we're very focused on continuing that momentum.

While we have not announced any large pilots and I do want to say we do have some very large prospects in our pipeline, we all know, as we've mentioned in previous calls that the retailers move at their own pace, I'm pleased to say that we feel our pipeline is as strong as ever.

We continue to add accounts and optimize existing accounts, which are all contributing to increased B2B originations.

To provide some color and some examples, we rolled our products out to another tire chain in the Northeast in January, and we just signed with a security company to be the lease-to-own provider for their home security equipment.

Our integration-less mobile process works very well in a consumer's home and was a big selling point to win this account.

We also have retail accounts -- existing retail accounts, which are growing organically and adding stores.

And of course, this also increases our B2B lease originations.

As far as targets go, furniture, tire, appliance, electronics and mobile phone retailers are some of the targets that our B2B marketing machine is campaigning to with our omni-channel payment solutions.

This activity is supported by continued investments in our sales force, which includes a very recent hire from one of the larger prime consumer finance companies.

He brings an extensive network of relationships, particularly on the retail consumer finance side, and we are very excited about his addition.

With that, I'll turn the call over to Rich.

Thanks, Brad.

Pardon me with my voice here.

As I mentioned in our last conference call, when I was very new to the company, I told all of you that moving forward, FlexShopper will be focused on providing maximum return on shareholders' capital deployed.

That means we'll be striving to originate assets that have the appropriate risk-adjusted return, and we will run the business in a way that does not dilute the value of our shareholders' equity.

I have been around these types of businesses for most of my career in different roles as a founder and operator, consultant and investor.

Without exception, I found successful companies in this arena focus on 3 fundamental pillars: quality risk underwriting, appropriate liquidity and the effective distribution of assets.

In our case, the distribution is divided between our direct-to-consumer marketing and the business-to-business marketing that Brad discussed earlier.

So with respect to underwriting, we made some significant changes to our direct-to-consumer strategy upon my arrival in October.

As Russ mentioned, that limited some of our growth, however, it substantially improved the quality of the assets we originated, which results in greater shareholder value.

Fortunately, for us, the type of asset we originate can be measured very quickly, which enables us to create new algorithms in a compressed time frame.

For example, the initial quality of a lease-to-own asset can generally be measured as early as 6 weeks as compared to a credit card asset, which can only be measured within a year or an auto asset, which we measured over several years.

So we have now created and implemented new algorithms, using a variety of data sources, which will enable us to improve our approval rate and grow the consumer business moving forward while still providing excellent returns.

These new algorithms, coupled with more sophisticated targeting techniques, give us the comfort to begin growing the direct-to-consumer channel again.

Moving on to liquidity.

We are very comfortable with our existing credit facility, which has an ample capacity.

As a company, we are in a much better financial position than we were when we negotiated this last facility.

Initially, our assets are providing better risk-adjusted returns.

We are very comfortable renewing our existing facility in February 2021, either with our current provider or any number of other credit funds I have done business with in the past.

Finally, the distribution of our leases.

Brad has taken you through how we are expanding the business-to-business channel.

This is a great channel for us because the cost to originate is lower, and generally, these customers generate better payment behavior.

We certainly think we add value to our retail plus partners and consumers alike.

However, unlike our direct-to-consumer business, the pace at which we sign new retail partners is somewhat out of our control.

So Brad is continuing to lead an aggressive push, as he talked about, and we're optimistic that we'll be successful over time.

Russ has provided our guidance for the year, which is based on events, we believe we can reasonably estimate.

Of course, any new large retail partner would obviously create additional growth.

In conclusion, the focus of this management team is to generate assets that create an appropriate return on shareholders' equity, while growing the company and maintaining appropriate liquidity.

And to answer the question that seems to be asked in every or many previous conference calls regarding raising additional equity.

We believe our return on capital approach will prevent FlexShopper from ever having to come back to the equity markets, unless we're in a favorable position and are looking for an exceptional growth opportunity -- an exceptional [next order of] growth opportunity.

We believe the execution of a warrant transaction we completed exhibits the management's confidence in our platform moving forward.

And with that, we're happy to take any questions.

(Operator Instructions) The first question is from Theodore O'Neill of Ascendiant Capital.

Just -- can you give us a little more color on the tightening of the underwriting algorithm?

Is that -- does that affect the type of product that a person buys or you're looking at the individual?

I'm just curious about that.

So basically, the algorithm did not change initially.

We just modified some of the cut-off strategies.

We look at the individual, and we're looking at the return on capital by score range.

And so we made some adjustments to that.

And that restricted our growth a little bit, but it produced higher returns at the portfolio level.

Since then, we've been able to create new algorithms, which, as I mentioned, will enable us to, once again, increase our approval rate and begin to grow again.

Okay.

The other question I have is just -- this is sort of an accounting issue.

So your growth in PP&E year-over-year looks pretty much like it's entirely based -- the increase is the right-of-use assets.

Can you just give us a little explanation about what that is?

Sure.

So this was a function of a change in the lease standard.

It reflects the new -- the building we moved into in the middle of last year.

But it is purely an accounting change.

The next question is from Scott Buck of B. Riley FBR.

It looks like in the guidance, you have a little gross margin expansion baked in.

Can you just give a little color around that?

Is that mix shift or something else going on?

It's a function of 2 things.

One is the shift in mix, as you mentioned.

As we've said before, B2B continues to have better performance.

The other piece of it echoes Rich's comments from earlier that is we've made changes to the B2C underwriting methodologies that -- performance in that segment continues to improve also.

So those 2 combinations will result in the gross profit expansion.

One point to note, though, our bad debt estimate is based upon trailing.

So as this new improvement comes in, it's not immediately reflected.

It does take time for it to work its way into the estimate for bad debt expense.

But that is what is causing the improvement.

Great.

That's helpful.

Second one, on the pipeline.

Any additional color you can provide there, maybe in terms of size or kind of pace through the year of new customer signings that we can think about?

Yes, this is Brad.

As far as color goes, again, we feel that this is the most robust pipeline we've ever had.

We do have some large prospects in there, large chains and excited about it.

Again, as has always been the story, we're ready today, they kind of move at their own pace.

At the same time, we continue to add doors.

We're very excited about this other vertical, home security, and also excited about this new hire that has an extensive network of relationships that we're looking to capitalize on.

(Operator Instructions) The next question is from [Mark Nova], a private investor.

I just want to say congratulations for an excellent 2019.

And the question I have is, what is the projected new default rate with the new tightened algorithm?

And how much do you think it will affect gross revenue this year?

We're really not looking necessarily to lower the default rate as much as we are trying to do a combination of looking at the default rate and combined with the acquisition cost of accounts.

We think about this simply as an IRR calculation, right?

It takes us a certain amount of money to book accounts, and then we measure cash flow over that time period.

So I would not look for a substantial decrease in the bad debt rate because what we're trying to do is target an IRR that we like and then maximize the volume associated with that.

This concludes the question-and-answer session.

I will now turn the call back over to Rich House, CEO, for closing remarks.

Okay.

Well, thank you, everyone, for joining us today.

We look forward to speaking with each of you again in the first quarter earnings call, and maybe we'll see some of you out and about at conferences as well.

So thanks a lot.

This concludes today's conference, and you may disconnect your lines at this time.

Thank you for your participation.