FlexShopper Inc (FPAY) 2021 Q3 法說會逐字稿

Greetings and welcome to the FlexShopper, LLC Third Quarter 2021 Earnings Conference Call.

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

It is now my pleasure to introduce your host, Jeremy Hellman.

Thank you, Jeremy.

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

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

Please go ahead, Rich.

Thanks, Jeremy, and welcome, everyone, to our earnings call.

Joining me today is our CFO, Russ Heiser.

And as always, Russ will be expanding on the key financial aspects of our quarterly results, and I'll cover our operational highlights.

Additionally, Russ and I are both kind of recovering from COVID, so we'll try to keep the raspy voices and coughing down as much as we can.

So we apologize for that ahead of time.

Our third quarter was solid with top line revenue growth and a nice increase in bottom line profitability.

Our year-over-year revenue was up 25%, and our EBITDA was up over 100%.

Despite the headwinds of COVID in the third quarter, we also continued to make progress in expanding our retail partner ecosystem.

As COVID rates continue to wane, we are optimistic those retail partners will see their operations normalize.

And as that occurs, we expect to see our lease throughput increase accordingly.

Throughout the pandemic, our direct-to-consumer FlexShopper.com website has proven a key asset and a driver of lease originations.

As we noted last quarter, stimulus programs were dampening demand across the rent-to-own industry as sub-prime consumers were in better personal liquidity position than historically has been the case.

That dynamic continued through the third quarter but has begun to diminish moving into the fourth quarter.

Our recent early payoff activity has begun to revert to historical patterns, and this should be favorable for our earnings moving forward.

This is particularly positive behavioral change heading into the holiday shopping season, which is traditionally our busiest quarter for originations.

Turning back to our retailer relationships.

We recently signed 2 additional partners who we began to roll out this month, and we are excited to see how these relationships will drive growth for the fourth quarter and into 2022.

Now I'm going to turn over the call to Russ and let him discover -- or discuss specific items regarding our financial performance.

Thanks, Rich.

I want to start with a reminder that we have posted an updated investor deck on our website.

In that deck, we have a number of data points that are useful in monitoring our performance.

The investor deck together with our press release and 10-Q provide significant insight into our third quarter operating performance.

Rich has mentioned our impressive revenue and EBITDA growth, so I'll dive into originations and gross margins.

First, at FlexShopper, we have mentioned repeatedly that we're going to focus on asset quality.

As a result, we're only going to make underwriting decisions that pass the appropriate IRR hurdle.

This has resulted in a decrease in originations in this quarter versus the same quarter last year.

Those of you that follow our peers have heard them mention that this stimulus environment has not been ideal for lease-to-own demand.

Whether this decrease is a result of our typical customer being presented with other liquidity options or having the personal liquidity, did not need our services or a combination, we believe this is transitory.

In 2020, the third quarter was the first period in which we resumed a more normal underwriting stance following our initial conservative reaction to the pandemic when we tightened underwriting.

Those of you that have followed us for some time will remember that there was some pent-up demand, and we had a really sharp increase in originations during that third quarter of 2020.

Conversely, the third quarter of this year continued to be impacted by stimulus and artificially suppressed demand for rent-to-own and other consumer finance options often utilized by non-prime consumers and results in an unfavorable comparison with originations down almost 30%.

However, our year-to-date originations versus last year are still up.

As we think about the end of the stimulus-impacted consumer behavior, we expect it to occur in phases.

The first is the normalization of customers choosing the early payoff or same as cash option.

For almost a year, customers have been choosing lower-margin early payoff options at double the pre-stimulus rate.

This quarter, as Rich mentioned, was a return to more normal take rates around our early payoff options and resulted in a bump in gross margin.

Gross margin expanded to 41% compared to 36% in the same quarter last year.

While our margins have historically had some variance due to seasonality in the average age of our portfolio at different times of year, the primary reason for this variance was less early payoffs.

The second phase of this transition back to a more normal environment would be the return of customer demand.

So far in the fourth quarter, our originations are right on top of last year's numbers.

However, as much as we would like to say that demand has returned to normal, with the holidays around the corner, it's too early to draw a distinction between seasonality and a normalization of demand.

Our net lease merchandise balance at the end of the third quarter was $33.3 million, which was up 7.8% from $30.7 million the prior year.

So despite all of the headwinds, we have been able to grow the portfolio.

Our largest variable cost is marketing expense.

Marketing is responsible for our growth in new customers and over time, our repeat customers, and we will continue to spend as much as we can at the appropriate acquisition cost.

Marketing expense is $1.8 million in the third quarter, which was a slight increase from the $1.7 million from the third quarter of 2020.

For the trailing 12 months, our average customer acquisition cost was $96, which was a level which we could still derive the appropriate returns on our capital.

We were able to support this higher acquisition cost due to impressive gains in the customer's first order value of almost 15% versus the same time last year.

Premarketing EBITDA was $6.6 million in the third quarter compared to $3.8 million a year ago.

Adjusted EBITDA more than doubled to $4.8 million compared to $2.1 million during the third quarter of 2020.

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

Thanks, Russ.

Overall, we believe we had a solid quarter and fared well despite the headwinds we faced.

In particular, I'm proud of the bottom line profitability we were able to report.

Looking ahead to the fourth quarter.

Conditions in our industry appear on their way to normalizing, and that bodes well for us entering the holiday shopping season.

On that front, I do want to make one comment around product availability as we've seen others comment on supply chain issues.

In our view, much of these delays center on larger items and white goods, like refrigerators or washing machines.

These are minor product categories for us, and our primary category is consumer electronics, and we are not seeing any delays.

One of the attributes of our FlexShopper.com website is that we have a number of drop-ship partners.

So if you go to our site looking for a gaming console, you will see options from several retailers.

That diversity of supply means we should be well positioned to deliver whatever item a consumer is looking for this holiday season.

As I have said for some time since I've been here, we continue to emphasize our core priorities, which are, in this order: underwriting, liquidity and distribution.

In good times and bad, those elements help us maximize our return on shareholders' capital.

However, I'd like to add to that comment.

We have a discipline of managing all of our marketing investments based on the appropriate internal rate of return at a marginal score range -- credit score range.

Therefore, there will be periods where we invest more or less marketing dollars based on market conditions.

In the previous 2 quarters, stimulus payments and COVID issues with our retail partners caused us to invest a little less in marketing we would like -- than we would have preferred.

Obviously, that has resulted, though, in significant increase in profitability, which points out the profitability of the assets that we're originating.

As I mentioned earlier, even though we have continued our investment discipline, we've continued to grow the portfolio.

Our goal is to invest as much as we can in the marketing dollars to grow the company as fast as possible, but we will never sacrifice the rate of return we expect on our investments.

And that includes -- that concludes our prepared remarks, and we're happy to take any questions.

(Operator Instructions) Our first question is from Scott Buck with H.C. Wainwright.

I'm curious, do you have a dollar figure in terms of originations that did not occur because of the store closures in retail?

Or even some kind of same-store year-over-year stats that you can share with us?

Well, same-store would probably not be appropriate, Scott, because we started with these stores, right?

So the same-store sales are much higher because we obviously just started.

So that would be -- and we've had a huge increase in same-store sales because we didn't have the retailer before.

We don't have a dollar figure, but I would say that it's probably in the order of -- because of COVID, I would say it's in the order of 20% less than we would have forecasted given a normal environment.

Okay.

That's really helpful, Rich.

And then, Russ, can you help kind of walk us through or speak to the improvement in gross margin and kind of what the expectation there is going forward?

Sure.

So I mentioned a good amount of the increase from 36% to 41% was driven by the reduction in early payoffs, and we had made some underwriting decisions when we had the increased early payoffs.

At the end of the day, as Rich mentioned, we want to originate at the appropriate IRR as many customers as possible.

So we've made some underwriting changes.

That will result in those gross margins returning to the high 30s going forward, and we should think about that as the long-range number.

Okay.

That's perfect.

And then the decline -- year-over-year decline in originations, is that driven by any particular product group or a subset?

Or is it pretty kind of broad across the offering?

It's pretty broad.

I think that -- what we look at is -- we have a model that we use internal rate of return, which includes the cost to acquire accounts and the payment behavior.

We haven't seen a substantial change in payment behavior because we're pretty disciplined on that.

Some of the cost to acquire accounts was higher this year than it was last year because I think a lot of people had pulled out of the market last year online.

So we just have to have the right discipline to do that, but it's across all categories.

But as Russ, I think, mentioned in his commentary, we're beginning to see that demand pick up again in the fourth quarter, and we're investing appropriately.

Okay.

That's great.

And then last one for me on marketing spend in the fourth quarter.

Should we expect a similar step up from the third quarter as last year in terms of kind of absolute dollar terms?

Or does the being a COVID year last year and maybe a little less so this year change that?

No.

We're essentially seeing -- as I mentioned, we're seeing originations right on top of last year.

We're seeing marketing spend really similar to what we saw in the fourth quarter last year so far.

So as demand picks up, we expect the same type of spend.

Our next question comes from Ed Woo with Ascendiant Capital.

My question is on competition.

Have you guys seen a significant increase in, I guess, lease-to-own or some of the buy now, pay often for payment type of competitors that have been recently entering the market?

No.

I think that the buy now -- I mean just to kind of frame this out, the buy now, pay later crowd, which is obviously growing very rapidly and has certainly been a favorite of the market, operates a little bit higher in the credit spectrum than we do.

So they're really not competitors with us, so to speak.

I think where the competition has increased is more people have been investing online -- in online marketing, which includes credit card companies and other providers of liquidity such as installment loan lenders.

So yes, there's more competition in the online market than there was last year.

But we're not directly competitive with someone like Affirm or Klarna because they're a little bit higher in the credit spectrum than we are.

Great.

And then my question is on the supply chain.

I know that there's been a lot of discussions about it.

Some of these people -- some of these retailers have been saying that they don't have all the products for this holiday season.

How bad is it?

And do you think it's going to get corrected in early '22?

Well, we've been fortunate, as I said in my prepared comments, in that in the electronics area, it's not been bad.

In fact, we had a -- recently, we had a special promotion with one of our main providers to sell GameStations, and that worked out very well.

We have enough electronic suppliers that they generally have one of the things that are needed.

We're not big in washing machines or refrigerators, et cetera.

And I think that's -- my understanding is that's where most of the supply chain issues are.

So we just haven't seen it causing a problem for us.

I'm not saying -- I know it exists, but it's not causing a problem for our particular business.

Great.

And then just one last question.

Inflation, is that a -- does that impact your business at all?

Theoretically, inflation would be, I suppose, helpful, right, I mean, because the prices would go up and we mark up prices, right?

That's what we do.

At some point, though, it would get too high, I suppose, where you'd get into an affordability issue.

But you can always combat that with the appropriate underwriting.

So I'm not too worried about inflation with respect to our business at this point in time.

I think if it got into like a serious inflation mode, then we would all have to think about that.

But where we are at this point in time, it may be more favorable than less favorable, but I think it's probably neutral.

There are no further questions at this time.

I would like to turn the floor back over to Rich House for closing comments.

Well, we appreciate all you guys participating on the call, and we'll talk to you next quarter.

Thanks.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.