FlexShopper Inc (FPAY) 2020 Q4 法說會逐字稿

Greetings, and welcome to the FlexShopper LLC Q4 and Full Year 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Jeremy Hellman of the Equity Group. Please go ahead, 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 as well as updating everyone on our most recent liquidity initiatives. I will conclude with a summary of our current strategy and our future opportunities.

Prior to handing the call off to Russ, I would like to highlight some key points regarding our business in the third quarter. Since I joined the company, I've tried to communicate to you that we build our success around 3 building blocks: Underwriting, liquidity and distribution. Distribution refers to our direct marketing efforts, our retail partnerships and our stimulation of repeat leasing. Basically, distribution describes how we create incremental lease inventory. It is in my experience in the specialty financial services business that properly executing these initiatives will provide profitable growth.

In the Q3 2020 Conference Call, I indicated the management team will lead FlexShopper was poised for significant growth. Of course, at that time, that was a forecast. Fortunately, during the fourth quarter of 2020, we began to empirically observe the growth we had forecast. Our leasing inventory increased 37.9% year-over-year from the end of December 2019 to the end of December 2020. We've continued to see continued lease origination growth of approximately 35.5% in January of 2021. Very importantly, the credit quality of our assets has remained stable even as we have enjoyed a significant growth in company's assets. As a result of both growth and asset quality, we now have a platform to drive substantial EBITDA growth throughout 2021 and beyond. Later in the call, I will speak specifically to the aspects that are driving our profitable growth.

I'm going to turn the call over to Russ now to address specific items regarding our financial performance and corporate liquidity.

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 added a few data points, including new and repeat lease volume by origination channel. 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 a new data point, premarketing EBITDA, which we think provides another window into how our business is performing. Marketing expenses are primary growth lever and largest variable costs and 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 the marketing expense would be expected to continue to increase.

The investor deck, together with our press release and 10-K, provide significant insight into our fourth quarter and full year operating performance. As Rich noted, our originations were up 37% in the fourth quarter, continuing the momentum we saw in late Q3 when we returned to pre-COVID approval rates. That was a function of both the lease count increasing by 27% year-over-year and average order value, or AOV, increasing by 9% to $464. For the full year originations, they increased 28% with lease count responsible for 24% of the growth and increases to AOV for 4%. As I have mentioned previously, current period originations are highly predictive when it comes to forecasting revenues over the ensuing year since we recognize the lease revenue over the term of the lease.

The strong fourth quarter originations resulted in a year ending lease merchandise balance of $42.8 million, which was up 38% from the prior year and up 40% from the prior quarter. As a reminder, the lease merchandise figure represents merchandise that has been leased by consumers, net of accumulated depreciation and any impairments. This is a good proxy of the size of the performing lease portfolio, and as such, is also highly correlated with forward 12 months revenue and gross profit. For the full year, gross profit margins increased to 35%, which was up from 32% in the prior year. This increase is from a combination of effects. On the positive side is the increase of repeat customers, offset by the increase in early payoff transactions seen for much of 2020, which we believe was a by-product of government stimulus.

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 was $2.3 million in the fourth quarter, which is a significant increase versus the $1.6 million from the fourth quarter of 2019. Marketing expense was up over 60% in 2020 versus 2019, yet new customer acquisition costs for both the quarter and the year decreased slightly versus the prior year periods.

New customer acquisition costs for the quarter came in at $76 in the fourth quarter and $78 for the entire year. These figures compared to $84 and $80 in the prior year periods.

EBITDA was $2.6 million for the fourth quarter compared to $1.1 million in the fourth quarter of 2019. The largest item driving the year-over-year change in EBITDA was improved operating income, which was approximately $1 million higher in Q4 2020 than in the prior year.

One subsequent event that I want to mention is, at the end of January, we signed an amendment to our credit facility that extended the term to April of 2024. In addition, the amendment modified several covenants and modified eligibility rules for our leases to free up about $2 million in additional cash. There were some further changes around permitted indebtedness and other carve-outs that provide a significant runway for company growth without having to access the equity markets. While we will not be providing formal guidance, we do want to provide some data points for January and February, so that everyone can get some sense of how 2021 has begun and the impact of the portfolio's growth in the fourth quarter of 2020.

Originations were up 17% in January 2021 compared to January 2020. Originations were up 14% in February 2021 compared to February of 2020. Also, total revenue in January was over $10 million with premarketing EBITDA of over $2 million and EBITDA of over $1.5 million in January.

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

Thanks, Russ. As a reminder, we continue to emphasize our core priorities, which are underwriting, liquidity and distribution. In good times and bad, those elements enable us to maximize our return on shareholders' capital. Since Russ has already covered our favorable liquidity situation, I will focus on credit quality and distribution.

Late in 2019, we implemented new underwriting strategies, and we have not seen any degradation in our credit quality since that time. This stability in credit performance continued throughout the fourth quarter, despite the fact there was no incremental financial stimulus to consumers from the Federal government. We are pleased with the credit trends that we have seen throughout 2020 and for the beginning of 2021.

With respect to distribution, I would like to address that topic for new consumer leases as well as repeat consumer leases. Both of these categories are demonstrating substantial growth, but I would like to address each of them more specifically. The right to consumer lease originations from new consumers grew 94.8% year-over-year in the fourth quarter of 2020. This occurred while maintaining a constant cost per new lease. Typically, in digital marketing, aggregate increased marketing expenditures drive higher cost to acquire each new consumer. However, we've been able to offset this typical outcome because we continue to expand the breadth of our marketing sources and deploy sophisticated analytical market segmentation. We believe our competency in digital marketing will continue to enable us to grow our direct-to-consumer business profitably and robustly.

Additionally, this marketing confidence differentiates us from our competitors in the lease-to-own industry. Our strategy is to continue growing our direct-to-consumer business via our unique FlexShopper.com marketplace and to assist our retail partners with their digital marketing initiatives, which leads me to our second distribution point of new lease originations, which is driven by our retail partnerships.

Despite the continuing drag associated with COVID-19, our lease volume associated with retail partnerships grew by 9.5% year-over-year from the fourth quarter of 2019 to the fourth quarter of 2020. We are very hopeful this year we will be able to significantly increase the earnings contribution associated with these retail partnership businesses. This will be driven both by adding new retailers and importantly, by maximizing the value of our existing retail partners. We have a nice sales pipeline for new retail partners, both in the physical storefront space and in e-commerce. However, it is always difficult to estimate exactly when new retail partners will make their decisions to roll out a program.

In the past, we've mentioned our ability to provide a point-of-sale solution using our proprietary mobile solution. This capability enables us to quickly set up pilot programs with new retailers without having to go through the process associated with integrating their existing point-of-sale technology solutions. This technology has served us well, and we will continue to feature that solution for our partners.

Having said that, we are also investing technology resources to integrate with popular FinTech point-of-sale solutions that are currently being used by many retailers. This is particularly important for retailers who have multiple financing partners, expanding the credit spectrum, who prefer to use a waterfall solution to seamlessly provide financing based on a consumer's particular credit profile. We recently completed the integration with one of these platforms, and we anticipate integrating with several more of these platforms throughout the year. This will improve our ability to easily integrate with retailers who prefer using an existing solution rather than our mobile solution.

While we continue to vigorously pursue new retail partners, we already have good relationships with our existing customers, and we know they are all driven to increase their sales volumes. Our strategy is to enhance our value as a partner by not only providing point-of-sale liquidity to their consumers, but to also provide value-added services based on our own success with marketing directly to consumers.

Early in 2020, we established a partnership with an e-commerce partner, and that relationship has grown to a multimillion-dollar relationship that continues to demonstrate healthy growth. The next step with this partner is to establish a unique co-branded portal to drive additional e-commerce sales by combining our marketplace technology with their online inventory. This type of solution is something we believe is unique in the market and is the type of relationship we are focusing on as we move forward.

Another example of a unique solution is associated with the pilot test we initiated with a diversified retailer in the second quarter of 2020. This pilot test has been successful, and we are rolling out that product from 1 state to 4 states as of March 15. We look forward to continuing to have success with our partner and hope to add hundreds of additional door fronts by the end of the third quarter of 2021. In this partnership, we are not only providing our mobile point-of-sale leasing solution, but we're also providing marketing and analytical support. Once again, we believe our experience in dealing directly with consumers through our experience at FlexShopper.com creates this unique advantage for our partnership offering.

In summary, our retail partner strategy is growing at a healthy rate, and we are seeking partners where we can differentiate our offerings to establish long-term relationships.

As Russ mentioned, we not only focus on new customer relationships, but importantly, we continue to see improvement in our repeat lease volumes. This success has primarily been driven by applying the same sophisticated analytical approaches we are using to acquire new leases to the segmentation and stimulation of our existing customer base.

In 2020, the volume of leases that were associated with repeat customers was 37.8% higher than 2019. The reason it is important to point out the significant improvement is because repeat leases are approximately 15% more profitable than new leases, and there is virtually no cost to originate these repeat leases. Therefore, the internal rate of return for repeat leases is much higher than new leases and is a key driver of corporate profitability. These 2 initiatives fit together nicely to create a virtuous cycle of profitability. The more we continue to grow new lease originations with the appropriate payment behavior, we create a larger population that may be harvested for the very lucrative repeat visits.

In summary, our distribution channels for both new leases and repeat leases have provided excellent growth for the company in 2020, and we look forward to more robust growth from these distribution channels in 2021 and beyond.

While we are generally happy with the things we can control within the company, we also have to consider other external influences on our business. The 2 items I have been asked most about recently are any future impact of COVID-19 and any effects associated with an additional Federal government stimulus. We have no way of estimating whether we are at or near the end of the COVID-19 impact on our retail partnerships. We do know we have seen their business begin to bounce back, as I mentioned earlier, we had -- and we have 2 partnerships that are growing with us in spite of the COVID-19 environment.

We've also demonstrated we can grow our direct-to-consumer business significantly in a COVID-19-challenged economy. Our view is, at a company level, we will continue to see substantial growth throughout the remainder of the year, irrespective of the timing of the general economic reopenings due to the government's reactions to COVID-19.

While the government's future reaction to COVID-19 may be uncertain, there appears to be much more certainty regarding the Federal government stimulus plan. It is planned to be executed in the coming weeks. We believe this stimulus is moderately favorable for our company. On the positive side, it will provide some additional spending and will enable some consumers who may be delinquent to fulfill their required payments. However, some potential new customers who may have chosen our longer-term lease-to-own solutions in the past may choose to purchase with cash or pay off their leases early.

Fortunately, while a consumer who pays off their lease early may not provide the immediate level of profitability we prefer, they do become an active member of our database for future marketing initiatives. After studying the data from the last stimulus, we've concluded the effect of government stimulus is generally positive, but there's nothing we need to count on to drive the effectiveness of our business model.

In conclusion, we are pleased to be in our position of demonstrating strong growth in the second half of the year, and as Russ mentioned, we are getting off to a nice start in 2021.

We're now happy to take any questions.

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

Just a couple for me. First, I'm curious if you have the number of applications during the fourth quarter and versus the year-ago period in front of you? Trying to understand how much of the lease strength was underlying demand for leases versus maybe some changes that you had made in the past year to your underwriting?

I do not have that number in front of me. I can tell you that the -- we have experienced very nice lease demand, but a great amount of that surge, if you will, in volume was driven by increased marketing activity.

Okay. That's helpful, Rich. Second, it looked like other operating expenses ticked up a bit in the quarter. Is there anything specific to the quarter in there? Or should we think about the $4.4 million or so as kind of a new run rate for that line?

Other operating expenses also includes a number of variable expenses, including the processing costs as the portfolio expands. But more importantly, it includes the cost of underwriting for all of these new applicants coming in. So fourth quarter has more marketing spend. It has greater lease applications and has more underwriting cost. So I wouldn't look towards that number as a run rate, but think of it as part of the seasonal adjustment.

(Operator Instructions) Our next question is coming from Ed Woo from Ascendiant Capital.

My question is, how is the rising interest rate impact, if any, your business?

The only sort of clear impact it has on our business is that our credit facility is a -- has a LIBOR component to it, and so that you would see that start to change our cost of borrowing. But outside of that, there's no significant impact on our business.

Great. And then my second question is, we're hearing a little bit about just increased shipping costs and some issues with supply chain coming out of China. Has that impacted your retailer business?

No. It hasn't had an impact on our retailer business, fortunately. The majority of our goods that we're leasing off of our FlexShopper.com sites are primarily consumer electronics, and there hasn't been any delays in those shipments.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

So thank you very much for joining us today.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.