FlexShopper Inc (FPAY) 2021 Q1 法說會逐字稿

Greetings, and welcome to FlexShopper Q1 2021 Earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Jeremy Hellman of The Equity Group. Please proceed, sir.

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.

Thank you, Jeremy, and welcome, everyone, to our earnings call. Joining me today is our CFO, Russ Heiser. This morning, Russ will be expanding on the key financial aspects of our quarterly results, and I'll cover our operational highlights.

Using a sports analogy, our first quarter can be summed up as one where we ran the play week [all]. We were able to grow the company revenue and EBITDA substantially by continuing to execute our proven digital marketing strategies as well as increasing our retail footprint and associated retail lease volume.

As our peers have also noted in their earnings reports, the main storyline for our industry has been the impact of government stimulus programs. We have maintained a position that stimulus is a modest positive for our business and all is said and done. However, there is an inter temporal effect associated with the effects of the stimulus program. On an immediate basis, stimulus impacts our business in two countervailing ways. First, we tend to see more of our delinquent customers make payments, and this is a good thing, of course. On the other hand, we all see -- also see a number of our customers pay off their leases early. Those early payments reduced the overall return on each of those leases.

Looking a little longer term, the capital we receive in the form of those early payoffs can be recycled into new leases. And with digital marketing costs remaining at levels we found attractive during the quarter, recycling our capital enables us to grow our book of business.

Additionally, in the longer term, stimulus helps our customers have a better personal balance sheet, resulting in better future [payment] behavior. Our ideal scenario is having those customers that paid off their leases early become repeat customers. As we have noted regularly, repeat customers are our most profitable due to the associated low customer acquisition costs and better payment behavior.

As you'll recall, our retail partner business was more impacted by the pandemic than our online marketplace. Notwithstanding the slowdown of our retail partner business due to COVID-19, we are happy to report that line of business is rebounding in the first quarter lease volume increased 19% year-over-year. I think it's also important to note the recent stimulus package passed by the federal government was the third round of stimulus. And over the course of the first two rounds, we were able to produce and analyze a significant amount of data that is supporting our current underwriting and marketing strategies. We have seen a rebound in demand after past stimulus payments have diminished, and we expect that to be the case later in 2021.

I'm going to turn the call over to Russ now to address the 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 several data points, including new and repeat lease volume by origination channel that are useful in monitoring our performance. In addition, we have broken out a number of operating and financial metrics by year so that the relationship between prior year originations and current year revenue and gross profit is evident.

In our presentation, we've also included pre-marketing EBITDA, which we think provides another window into how our business is performing. Marketing expense is our primary growth lever and largest variable cost varies quite a bit during the year in response to both seasonal consumer activity, along with external factors. Therefore, removing it from the EBITDA calculation is informative when looking at the business over time, especially as marketing expense would be expected to continue to increase.

The investor deck, together with our press release and 10-Q provide significant insight into our first quarter operating performance. As I have mentioned previously, there are two metrics which are highly predictive when it comes to forecasting revenue and gross profit for the ensuing year. The first is trailing 12-month originations since we recognize the lease revenue over the term of the lease. During the first quarter, our originations were up 21.5% on a dollar value basis. That was a function of both the lease count increasing by 8.7% year-over-year and average order value increasing to $532 from $475.

The second predictive metric is lease merchandise, which represents the value of goods that have been leased by consumers, net of accumulated depreciation and any impairments. This is a good proxy for the size of the performing lease portfolio, and as such, is also highly correlated with forward 12-month revenue and gross profit.

Our net lease merchandise balance at the end of the first quarter was $39.3 million, which is up 31.4% from the prior year. For those of you looking at the balance sequentially, it is normal to expect Q1 to fall somewhat from Q4 given the seasonality in our originations, which peak in the fourth quarter. As customers make payments on the leases originated in Q4, the net lease merchandise balance will go down. It is offset to a degree by new leases originated in the first quarter, but with Q1 originations below that of Q4, the net result is a dip in the net lease merchandise balance. However, that dip was accentuated by what was a significant increase in the percentage of early payoff transactions over what we have seen historically. We believe this is a byproduct of government stimulus.

The impact of stimulus can also be seen in the dip in gross profit margins. First quarter gross profit margin was 31% compared to 32% in the prior year as a result of these unusual early payoff transactions. The company's 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 first quarter, which is a significant increase versus the $1 million from the first quarter of 2020. The main driver of this increase in marketing expense was the availability of digital marketing opportunities at levels where we can acquire customers at or below our targeted acquisition cost. For the quarter, our average customer acquisition cost was $82.

EBITDA was $2.4 million for the first quarter compared to $2 million in the first quarter of 2020. So we're off to a great start for the year. With that, I'll hand the call back over to Rich.

Thanks, Russ. By all accounts, the first quarter was a quiet one of steady execution. Our customers are generating good shape financially, so that's a positive for our credit quality. Our payment performance, as measured by cash received as a percentage of billed leases, was higher than any other quarterly period in 2019 and 2020. Even with the improved personal balance sheets, we are still seeing solid demand for our lease-to-own offerings as are our peers in the industry. I think that is primarily a function of the low weekly payment the customer enjoys with FlexShopper, which is more appealing than seeing several hundred dollars leave their bank account in one chunk.

Before opening the call to your questions, I want to spend a moment discussing our retail partner or business-to-business, B2B business. Last quarter, we noted that a pilot program with a national retailer was set to expand from one state to four. That rollout, which occurred in March and April timeframe, has been successful, and we are now in over 300 storefronts with this partner. We continue to receive positive feedback from this retail partner and expect to expand our relationship to include additional states over the course of 2021. We're optimistic this partnership will accelerate our lease volume growth for the second half of 2021 and beyond.

We are also busy working to secure additional B2B partners with a number of active discussions working their way towards pilot agreements. As COVID restrictions continue to be lifted, we expect these discussions to accelerate.

In conclusion, our strategy is to continue to focus on the long-term growth of high-quality assets, which will drive long-term profitability. We plan on continuing to invest our excess cash into our marketing efforts to maximize this long-term opportunity. As always, we continue to emphasize our core priorities which are underwriting, liquidity and distribution. Irrespective of macroeconomic events, those elements enable us to maximize our return on shareholders' capital.

That concludes our prepared remarks, and we're happy to take any questions.

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

I'm curious, can you tell us in absolute terms or maybe in percentage terms, the difference in early paydowns during the first quarter of this year versus the year ago period?

Sure. So we typically think of early payoffs accelerating in the first quarter of each year as we have tax refunds. But typically, that results in an early payoff percentage. That's about 13% to 14% of the portfolio. And this period was north of 16%. Great.

That's really helpful, Russ. Second, could you help me understand who the incremental borrower is? With lease originations up 20%-plus year-over-year, I'm curious if -- you're reaching a number of new customers or customers are taking larger leases than they have in the past, a combination of both? I mean, what are the kind of moving pieces there?

We believe there's two factors that are occurring. One is additional consumers that we're able to target via expanding our digital marketing channels. We've had a good success using technology that will enable us to go to different digital marketing channels that we were not using before. So we're finding some incremental customers to drive to our marketplace.

Secondly, within our digital marketing place, flexshopper.com, we are using technology that is better able to target which consumer comes to see us and to focus a product offering that is most suitable for them. And that, we believe, is what's driving the increase in our average order value.

Great. That's helpful. And last one, I'm just curious, what are the items that are actually driving demand? I think we've kind of clearly moved out a lot of the household stuff that drove lease demand in spring, summer of last year. So I mean what are the items now that people are most interested in?

Our mix, as we've talked about in the past, has been primarily consumer electronics. We still see consumer electronics as being the driving force in our lease originations.

One of the -- Scott, to get more into detail with it on the average order value, we see consumers coming in to buy consumer electronics. That's our biggest opportunity right now. But we're also able to use our technology to kind of combine some products, if you will. So much like I'm sure many of you shop online, you'll see suggestions of what to buy in addition to what you're initially buying. And we've been able to incorporate some of that type of technology and suggests consumers other complementary products, and that's been successful for us.

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

Well, we'd just like to thank you guys for joining us. And...

We do have a question come in queue. One moment. Let me just double check to make sure. We have a question come from Ed Woo from Ascendiant Capital.

My question is, how do you see the shift towards online sales impacting your business? How do you guys manage to continue to grow that business, again, as you said, more consumers getting more comfortable to focus almost exclusively buying stuff online?

Yes. We definitely believe that is a tailwind for us. We have a fairly substantial robust online marketplace. And as more consumers become comfortable purchasing online, that is definitely in our favor. And that's why we've been able to invest in expanding our digital marketing channels as the typical kind of Google search or Facebook advertising, we've gone to other channels as well as consumers are out there looking to shop online, and we see that as a positive tailwind for us.

So our strategy, as we've talked about in previous calls, is we have our direct-to-consumer business, which we're growing at a very healthy rate, and we're trying to complement that by supporting not only our retail partners who have an in store presence, but we're also -- our sales team is focused on other retailers who would like to move into the digital arena, but may not have done that yet, and we can use some of our expertise that we've developed over time, marketing digitally to help them enter into the digital space using our expertise.

And so we think that gives us, potentially moving forward, some type of competitive advantage as we compete with others in the retail space.

Once again, I'd like to turn the call back to management for closing comments.

Well, once again, and thank you for joining us today. We'll look to speaking with you for -- on the second quarter call and a few months.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.