FlexShopper Inc (FPAY) 2022 Q1 法說會逐字稿

Greetings. Welcome to FlexShopper LLC 2022 First Quarter Financial Results Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to Carlos Sanchez, Investor Relations. Thank you. You may begin.

Thank you, and good morning. Welcome to FlexShopper's First Quarter 2022 Earnings Results Conference Call.

With me today are Howard Dvorkin, Chairman of the Board; Russ Heiser, Chief Financial Officer; and John Davis, Chief Operating Officer. We issued our earnings release last night and corresponding investor presentation this morning, and we will be referencing these during the call.

Both can be found on the Investor Relations section of our website. We will be available for Q&A following today's prepared remarks. Before we begin, I would like to remind everybody this call will contain forward-looking statements regarding future events and our financial performance, including statements regarding our market opportunity, the impact of our growth initiatives and our future financial performance.

These should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC reports, including quarterly report Form 10-Q as of March 31, 2022.

These statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise.

During today's discussion of our financial performance, we will provide certain financial information that constitute non-GAAP financial measures under SEC rules. These include measures such as adjusted EBITDA and adjusted net income. These non-GAAP financial measures should not be considered replacement for and should be read together with our GAAP results. Reconciliation to GAAP measures and certain additional information are also included in today's earnings release, which is available on our Investor Relations section of our website.

This call is being recorded and a webcast will be available for replay on the Investor Relations section of our website.

I will now turn the call over to Howard.

Thanks, Carlos. Good morning, everyone, and thank you for joining us. On the call, we will review the results of the first quarter 2022 and provide an update to our growth strategy.

I know that it's not often the Chairman speaks on quarterly calls, but there are some items that I thought it's best to cover personally. First, I'd like to -- first, you'd likely notice that Rich House has not joined us today. He is on medical leave at the moment, but we do expect him back in action in a few short weeks.

In the interim, I'm joined by our CFO, Russ Heiser, who most of you have known for a few years now. Also joining us is John Davis, our COO. You can expect to hear from John a good bit today. And going forward, as he has become an integral part of the FlexShopper team over the last year or so. He joins us with 20-plus years of nonprime consumer financial experience both in the U.S. and abroad and will be part of these calls going forward.

For those of you who do not know me, I've been in the consumer credit industry for almost 30 years. I have built, bought, sold several companies over the course of my career. Because of my past experience, I was introduced to FlexShopper around 5 years ago, and have been actively involved as an investor, advisor and current Chairman of the Board.

When I first met FlexShopper, the concept of virtual lease-to-own made total sense to me, and that was my attraction to the company. I saw the potential of being able to help consumers purchase durable goods who are unable to use traditional credit programs.

FlexShopper initially focused on lease-to-own transactions occurring outside the traditional brick-and-mortar stores and built its own marketplace for its customers, very unique at the time. Over the past years, we have added payment methods, which allows consumers to shop at their favorite stores and partnered with numerous retailers to grow sales with credit-challenged consumers.

FlexShopper is not the only virtual lease-to-own company, but I do believe we are the best. And we have the best marketplace. This is the most straightforward and consumer-friendly offering on the market. We knew that we did not want to be a B2C player only and have invested money and time into developing retail partnerships which have added new avenues for growth.

In the last quarter, our retail partners and payment plug-ins made up 40% of our leases. That business did not exist a few short years ago. Our retail partner business has a lower cost of acquisition and higher lease values leading to better return on capital.

We continue to add new partners and invest in building this business. I realize we do not share a lot of details of our retail partners. That's on purpose. That's due to competitive positioning. I assure you that this will continue to be our focus as we work to invest to build this part of our business.

We have also partnered with a bank to add installment loans as a complementary product to assist nondurable good retailers drive installment loans more. John Davis is managing that business, and we expect that to continue to drive growth in revenues in the future.

We spent a lot of time and effort launching this business and have rolled it out slowly as we want to make sure that our underwriting and risk models are working properly, especially in this environment where our customers are facing severe inflationary pressures.

Now as Rich House is not on the call, the one thing he has always stressed in the past to his team is risk-adjusted return of capital. I agree a 100%. We do not want to be in the business of losing money. I stress to the team that we need to grow, but in an economically sensible fashion, we don't need to grow just for the sake of growing.

We don't have the balance sheet or capital costs of some of our peers that can take more risk on this type of consumer. We invest for the long term, and that's where we'll stay. I know many of you have been disappointed with the organization's growth over the last year, and frankly, so have I.

However, in this environment in which disposable income has been steadily declining for our applicants, this was the absolute correct decision. As you have heard on the previous calls, the amount of federal stimulus, what I believe was expansion in credit from lenders that are typically not serving this type of consumer.

We need to make the appropriate decisions even if it meant to lower originations. I continue to have the utmost confidence in this business model as you can -- as can be seen by our growth in my stock purchases as well as my commitment of debt capital to provide profitable growth.

So that are some of the thoughts and history of FlexShopper. But I did want to talk a little about why I think at this point, we are in a great position to take the company to the next level. We spent some funds this quarter to invest in sales support teams and support our retail partnerships, and that alone has won us deals.

The boots on the ground concept to supporting lease origination growth is the right strategy. While this results in near-term EBITDA declines, it will be a terrific investment over the long run. As mentioned in the last call, FlexShopper continues to expect double-digit EBITDA growth for this year.

I also know that some of you are likely concerned with the growth of our debt. In this consumer lending space, our most efficient way to fund growth is through additional debt. As a significant equity investor myself, I'm focused on driving earnings as much as prudently possible knowing that it will eventually represent a stock price increase.

While the equity values of the entire consumer finance segment, including FlexShopper have declined significantly over the past 6 months I have continued to invest in FlexShopper when I am allowed to purchase.

FlexShopper has continued to grow EBITDA and earnings on a full year basis when the majority of our peers are declining. That's incredibly important to note. I am not sure whether it is our size or perhaps our focus on the business and not on investor outreach.

FlexShopper continues to being somewhat misunderstood by the market. As the company continues to focus on new products and strategic opportunities, we will also be doubling down on investor outreach in a variety of forms to let our investor community better understand and appreciate the good things that are happening in at FlexShopper.

I will stay on the call and we'll be happy to answer any questions at the end. I will now hand the call over to Russ to go over the first quarter results and further discuss some of our new initiatives as we mentioned.

Thanks, Howard. Around the time of FlexShopper's founding, rent-to-own was evolving away from stand-alone rent-to-own stores for the credit challenged and into offering save-to-sale opportunities in all types of brick-and-mortar locations.

With the creation of this virtual rent-to-own product, these same credit challenged customers were able to access goods that weren't available in the traditional rent-to-own stores. The concept of FlexShopper was to expand this strategy by creating an online marketplace where customers could have an access to even a wider assortment of goods.

And over the last several years, we've seen some of our competitors move towards our segment looking for additional growth. At the same time, FlexShopper expanded its technology and began to partner with brick-and-mortar retailers. However, in speaking with these retailers, we learned that the rent-to-own product was not a one-size-fits-all solution for their credit challenge customers.

Some retailers were in states without traditional lease-to-own regulations, other retailers were focused on service offerings, including repair that did not fit into the durable goods criteria for our lease-to-own offering. As one might expect, other retailers offered both durable goods and services, but were only offering liquidity options for a portion of their business.

Therefore, a little over one year ago, FlexShopper began a partnership with a third-party bank that would allow us to assist retailers by offering installment loan products to the underserved credit-challenged customers. This has significantly increased FlexShopper's addressable market and provide significant runway for further growth.

Perhaps more importantly, it expands upon FlexShopper's initial vision of bringing the financial inclusion to underserved non-prime consumers with new solutions. These new solutions allow these non-prime consumers to access the essential products they need for everyday living. We are continuing to look for strategic ways to provide new offerings to this consumer.

In the interim, our suite of merchant solutions across a variety of integrated point-of-sale options is expanding and allowing merchants to access our products more efficiently. In addition, our legacy marketplace allows us to approach these customers with follow-on opportunities. We are committed to continually improving the customer and merchant experience to gain share in our addressable markets while creating new products to grow this addressable market.

I'll let John focus on how our team is navigating an economic environment that is challenging for both our merchant partners and consumers. But I want to emphasize that while we are not immune to these macro pressures, we are confident in our longer-term ability to handle these challenges while staying focused on capturing new volume opportunities.

Key strategic highlights for the first quarter are the growth in new store fronts. Our pilots that we have mentioned in the past are proceeding well and with a robust pipeline, expect to add another 1,000 storefronts or about 75% new stores in the coming months. In addition, the loan participations have been growing rapidly and allowed us to comp positively versus the same quarter last year when combining both loan participations and lease originations.

Finally, before I dive into the financials, it's important to note that during the quarter, we added high-caliber talent in key leadership roles to facilitate the execution in support of our growth opportunities. Changes in CMO and CRO have been made to complement the change in the CTO role that occurred last year. All of this works together to help us create a sizable, durable and scalable business.

Before I cover our financial results for Q1 '22, I want to remind investors that the rapidly changing macro environment weighed on some of our metrics. Total revenue for the first quarter of '22 was $29 million, which was down 11.7% year-over-year. Lease revenues were $27.8 million and down 15.2% year-over-year. Loan revenues were $1.2 million and up over 3,000% year-over-year as we expand upon this new product.

Gross originations were only up 1% due to the impact of this and micro challenges that we experienced. As we noted earlier, tighter underwriting, lowered approval rates that also drove this slower growth. Lease originations were $16.3 million and down 22.1% year-over-year. Loan participations were $4.9 million and up almost 5,000% year-over-year.

Gross profit was down $1 million, almost $1 million year-over-year due primarily to declining lease margins driven by underperformance in our lease portfolio for parts of 3Q. Our net loss for the first quarter of '22 were $2.4 million compared to net income of $1,200 in Q1 2021 and adjusted EBITDA decreased by $2.5 million.

Operating expenses below gross profit were up $1.8 million year-over-year. The total operating expense difference is largely driven by 3 factors: the largest increase is the incremental variable costs, including marketing and support services to expand the loan business that did not exist last year.

As we continue to grow that business, the scale effects will lower the impact of these increases. The largest cost is -- the next largest is the cost of field support team that has been assisting the sales efforts in our new retailer doors. This team has been instrumental in helping support pilot programs, win new business and increase the fundings of our current storefronts.

Some of these costs are upfront costs that will moderate as new retailers come on board and we achieve better scale efficiencies. The final factor are some duplicative technology costs as we create more scalable and efficient processes, both on the lease management and customer servicing teams.

These costs will decrease significantly in the coming months. All of these decisions are part of our strategic growth plan and the ordering of all of our efforts are based on what creates the maximum return on investment. John will touch more on the changes in underwriting over the past 6 months.

However, the bad debt allowance will continue to reflect higher than stimulus period bad debt for the near future. We are finalizing opportunities to monetize some of our past due accounts that will significantly offset the increases in our bad debt allowance.

I will now turn it over to John to discuss our operations in more detail.

Thanks, Russ. I would like to begin by discussing our new lending initiative. FlexShopper has engaged with a third-party bank partner to offer consumer loans to our customers as an alternative to our lease product.

By offering a loan customers can finance a wider array of goods and services that a lease product does not allow. This provides our customers more flexibility in their purchasing ability, our partners with increased ability to grow their sales and FlexShopper with a new avenue for originations growth.

Our loans program was launched in Q4 of 2020 and has been in testing through 2021. We have been pleased with the initial performance of our testing and now starting to increase origination volumes to larger levels. Approximately $5 million in loans originated in Q1 of 2022 by our bank partner, which exceeded total loan origination volumes during our 2021 test period.

We intend to continue to expand our loan program volumes in Q2 as well as for the rest of 2022. As we add these new customers to our portfolio, we are continuously monitoring asset quality and adjusting our underwriting standards to ensure that loan performance meets our expectations. Having another financial product to offer to our customers, provides FlexShopper diversification in its revenue sources beyond our lease channels. It increases our growth avenues.

Coming into 2022, our customers are facing an increasingly difficult macroeconomic environment with higher food, housing and energy prices, placing pressure on their disposable income. While our customers have been resilient to the impacts of the pandemic over the past 2 years, the combination of increase in costs and reduced support from the government in the form of stimulus has created some headwinds for customer payment performance within our lease book.

Keeping asset quality strong is a key tenet of our business. We have seen some higher defaults in our customer payment performance in 2021 compared to 2020, which caused an uptick in our bad debt allowance as Russ has mentioned. And as a result, we have tightened our underwriting standards through the first quarter of this year. We are always mindful of our return on capital and will prioritize asset quality over growth.

Though our tightening has suppressed lease origination volume levels in the first quarter, we are pleased with the early analysis of these underwriting changes, and we expect our bad debt reserve levels to improve over the year as these changes mature into our portfolio.

Additionally, we continue to invest in our decision [science] team that will allow us to further optimize the wealth of data available to us as we evaluate new and repeat customers and enable us to approve more applicants while keeping asset quality high.

We have observed that some of our peers in the lease-to-own space have experienced an increase in their bad debt reserves and charge-offs as well. In this kind of environment, what has happened in the past is that consumer lenders, both at our peer group as well as above us in the credit stack begin to tighten as well.

As a result of this, more customers with an average quality -- higher average quality customer profile become available to FlexShopper as these customers no longer qualify for offers previously available to them. While it is early going, we are starting to see this demand increase in Q2. Again, keeping asset quality is an important tenet of our business, so we will continue to be proactive to ensure that we react quickly to shifting markets and economic conditions.

As Russ previously mentioned, total origination volume was up 1% year-over-year due to the increased origination volume from our loan product. However, lease origination dollar volume was 0.2% lower year-over-year in part due to tighter underwriting standards I previously mentioned as well as lower demand for -- as our customers are becoming accustomed to their higher cost of living.

However, we have a natural competitive advantage compared to others in our space due to having both our proprietary direct-to-consumer marketplace as well as a growing point-of-sale partnership distribution model. We are starting to see a positive shift in consumer demand this quarter in both our lease channels as other lenders are adjusting their standards.

We have invested in our internal marketing team over the first part of 2022 and who are achieving success in enhancing personalization, programmatic communication strategies, marketing channel mix and remarketing efforts, which are resulting in improvements in repeat customer originations and the highest conversion rate on our approved applicants not seen in quite some time.

Our repeat customers demonstrate significantly better payment performance in comparison to our new customers. and higher proved conversion rates represent 0 cost leases to us as marketing spend was already incurred to attract potential customers to apply. Our repeat customer mix represents almost half of our total lease originations and this mix is at its highest level that we have seen since Q2 of 2020.

I'm very pleased with both of these trends, and I'm excited about future gains that these growth initiatives can bring to our company. On our point-of-sale partnership channel, we are enjoying strong momentum in retail partner storefronts that have FlexShopper lease and loan products available with a 16% quarter-over-quarter increase achieved.

We are currently rolling out new partnerships and have a strong pipeline of potential new relationships that will provide additional opportunities for FlexShopper distribution. As mentioned in our earnings press release, we are expecting a significant increase in our partner store front count over the next couple of quarters.

There's also a halo effect that our loans and marketplace businesses will experience as new customers are introduced to FlexShopper and make subsequent purchasing or lending transactions through our other available channels. Taking into account all of these positive trends, on both our marketplace and point-of-sale lease channels, we expect lease originations to be higher year-over-year in Q2, while at the same time, keeping our tighter underwriting standards in place, which will be the first time we have achieved a positive lease year-over-year comp since Q2 of 2021.

We are optimistic about achieving growth both in our lease and loan channels while keeping asset quality in line despite the challenges that our customers are experiencing with escalating inflation and removal of stimulus support. I personally joined FlexShopper 1.5 years ago because of the tremendous opportunity I saw in the company, the platform and the team.

And I'm excited on where the company is going. With that, let me turn the call back to Russ.

Thanks, John. In conclusion, as we look ahead to the rest of the year, we remain confident that FlexShopper is positioned to grow through this continuous turbulent environment. The leadership team and the entire company is focused on pursuing the strategic options that will drive our next phase of growth. .

Most importantly, for investors, we're still confident in growing full year EBITDA versus last year. With that, we'll now take any questions.

(Operator Instructions) There are no questions at this time. I would like to turn the call back over to management for closing comments.

Thank you for your time, everyone. We're really looking forward to the rest of the year. I think you're going to see some interesting strategic announcements in the second half of this year. .

We are very bullish about the opportunities in front of us and what they mean for the company and its shareholders. Thanks always for your support, and thanks for your time today.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.