FlexShopper Inc (FPAY) 2020 Q2 法說會逐字稿

Greetings, and welcome to the FlexShopper, Inc.

Q2 2020 Earnings Call.

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

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

Please go ahead, Mr. Hellman.

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 2020 second quarter earnings call.

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

We'll be following our usual road map with Russ expanding on key aspects of our second quarter results, and Brad will provide an update on our business-to-business partnership operations.

I will conclude with a summary of our current strategy and a few other key points.

But before I hand it off to Russ, I'm going to make some brief comments regarding current business conditions.

On the whole, key elements of our business have remained consistent with what we said last quarter.

Most importantly, credit quality continues to be favorable.

Our online B2C marketplace, FlexShopper.com, has operated as one would expect, and our online business do prove out the broad-based shutdowns implemented in response to COVID-19.

Generally speaking, consumers shifted a meaningful amount of their shopping to online revenues while sheltering in place, and our online marketplace was a beneficiary of that increased traffic.

That trend, coupled with additional sophistication in our digital marketing algorithms, enabled us to enjoy reasonable growth in both revenue and EBITDA during a suppressed economic environment.

And we were pleased with that outcome.

With respect to our retail or [B2C] business, it was naturally slower in the second quarter due to shelter in place restrictions in addition to our more restrictive underwriting, which reduced in-store approval rates.

Over the course of the second quarter, all the states where we do business went through phased reopening programs.

And as they did so, our retail partners began to see their in-store traffic slowly start to return.

As of the end of the second quarter, consumer traffic at those physical stores had improved from the low points seen early in the quarter when shelter in place orders were in the norm.

However, those stores have not yet returned to pre-COVID activity levels.

And as we speak with you today, that is still the case, although the trend is in a positive direction.

At the end of the second quarter, our retail partners were about 70% of their pre-virus volume.

And at the end of July, they are at the run rate of about 80% of their pre-virus volume.

We are hopeful this trend continues to improve as the economy reopens.

I will now hand this over to Russ and let him discuss the financial highlights.

Thanks, Rich.

Our 10-Q press release and investor deck provides significant detail on the second quarter, so I'll focus on a few high-level metrics.

Our second quarter originations, or invoice volume, was up 16% over the same quarter last year to $15.3 million but down 11% compared to the first quarter of 2020 as the COVID pandemic impacted our approval rates, as Rich mentioned earlier, and more specifically, our B2B segment via lower store traffic.

Using February as a pre-COVID baseline for comparison, invoice volume in the B2C segment has been increasing since then and in July was up over 23% versus February.

However, invoice volume at the B2B segment has experienced significant volatility since February.

March was 78% of February's volume, followed by a low point in April, where B2B invoices were only 45% of February's volume.

Both May and June were approximately 70% of February volume with significant rebound in July, where B2B volume returned to 84% of February's pre-COVID volume.

Net revenues for the second quarter were $22.9 million, an increase of 15.1% compared to the second quarter of 2019.

The revenue performance was primarily driven by higher year-over-year portfolio balance.

Gross profit margins increased to 29.9% compared to 28.6% in the second quarter of 2019.

However, gross profit margins did decrease from the first quarter of the year.

The primary reason for the sequential quarter decline is a significant increase in some monthly periods as much as a 50% increase in early payoff transactions.

Government stimulus during the second quarter drove this increase in lower gross margin transactions.

But recently, the overall percentage of these early payoff transactions seem to be returning to historical levels.

Marketing expense was $938,000 in the second quarter and is a significant increase versus the prior year's quarter of $314,000 but was in line with the previous quarter sequentially.

Marketing spending is responsible for driving new customer growth and new lease originations, and over time, is what grows revenue.

New customer acquisition costs for the quarter came in a little below $88.

This was about 20% higher than last quarter and driven by the significant mix change in new customers between B2B and B2C and the underwriting changes resulting from the COVID environment.

EBITDA was $2 million in the second quarter, an increase of 12.7% compared to the second quarter of 2019.

EBITDA margins were 8.2% in the second quarter compared to 8.6% in the prior year's quarter due to significant increases in marketing expense.

Removing the variable marketing component from each period, margins were 12.2% in this quarter versus 10.1% in the prior year quarter.

Put another way, as we continue to grow and to scale FlexShopper business, every expense line item, from bad debt expense to salary expense, stayed flat or improved on a relative basis versus the same quarter last year except for marketing expense.

And this is marketing expense which is driving our future revenue growth through new customer acquisitions.

I'll hand it over to Brad for an update on the B2B business.

Thanks, Russ.

As Rich mentioned, since our last call, existing retail partner originations have rebounded but not to pre-COVID-19 levels.

Our hope is that with enough time to adapt to the changing environment, and barring future adverse retail conditions stemming from COVID, existing retailer originations will return to normal.

More importantly, we have put some retail wins on the scoreboard recently.

One is an online retailer using our e-commerce payment method technology.

We're already at an annualized multimillion-dollar lease origination run rate with this partner.

I'm also pleased to share that we started a 24-store pilot with a merchant that sells a variety of merchandise, ranging from electronics to bikes to musical instruments.

Our team did a great job of launching this pilot in a very short time frame, and our speed to market is also a testament to our mobile lease-to-own technology.

As a reminder, our mobile app provides a quick and seamless process for retailers and consumers to transact on a lease-to-own basis.

Today's retailers are looking for innovative and contactless ways to grow their business without the headache of integration or additional work for their employees.

We meet these needs with our mobile application that enables consumers to apply for a spending limit, sign a lease and pay the retailer instantly at the point of sale.

We are obviously working closely with our new partner to make the pilot a great success.

As we mentioned on our last call, we also believe that the acceleration of online sales that many retailers are experiencing will continue past the COVID crisis, which is why we are very focused on marketing our seamless online lease-to-own payment method at checkout to e-commerce sites.

We believe that online behavior adopted by consumers during this period will stick with many, and obviously, we want to capitalize on that.

And now I'd like to turn the call over to Rich.

Thanks, Brad.

For the last 3 quarters, we have emphasized our core priorities, which are underwriting, liquidity and distribution.

We believe in good times and bad, those elements enable us to maximize our return on shareholders' capital.

I've also focused quite a bit on how we balance risk management with investments in growth, such as digital marketing expense.

Looking back over the period from the beginning of the year until now, we have not seen any degradation in our credit quality.

Data is clear that our year-over-year credit quality has improved.

And in fact, July 2020 was more favorable than June 2020.

We can speculate, just as our competitors and all of you may do, what is driving this favorable credit performance.

Government assistant programs have enabled many employers to keep employees on the payroll, so that has likely been supportive of our credit quality.

On the other hand, the unemployment rate is up sharply, which is certainly not helpful.

Furthermore, we know mathematically when we tighten the cut-off strategies using our improved underwriting algorithms, credit quality improves.

With all of those crosscurrents in mind, we remain somewhat conservative when it comes to our underwriting practices and the economic outlook.

It is important to note that although we were conservative in our underwriting in the second quarter, we did opportunistically conduct risk and marketing testing, which would be appropriate in a more stable economic environment.

To date, the results of that testing look positive.

Therefore, we are prepared to grow more rapidly if we see favorable economic trends or policies.

Of course, we are monitoring the development of current federal legislation and debate.

We are not in the business of predicting the outcome of such things, so I'd rather not comment extensively on what that will ultimately mean for our business.

However, it is likely that more stimulus would be favorable for FlexShopper, although we're not dependent on additional government stimulus to operate our business.

Over the course of the second quarter, we did increase our digital marketing spend as we felt doing so would deliver a significant return on shareholders' capital.

Over the past 9 months, we've been able to create more sophisticated algorithms for digital marketing, which has increased the earning power of our B2C business and underpinned our growth in leases and net revenues during the quarter.

We were very happy to have a nice growth rate in a suppressed economic environment without taking undue credit risk.

Additionally, as Brad mentioned earlier, we believe the progress we are making on the retail side of the business will provide another catalyst for our growth.

From a new customer origination point of view, I think it's appropriate to have multiple channels of growth.

This enables us to modify marketing decisions with changes in the economic environment.

We believe the 3 strong -- 3-pronged strategy we have been able to create, which includes direct-to-consumer marketing, storefront retail leases and leases to consumers who visit our electronic commerce retail partners, is a winning strategy to grow our customer base.

Finally, since last October, we've been focused on improving the credit risk profile of our portfolio.

This improved cash flow and a derivative benefit is that it creates a creditworthy population of consumers who are aware of FlexShopper and are eligible to become repeat customers.

I noted last quarter that we've shifted a substantial portion of our marketing investments to stimulating our existing and former consumers to increase their leasing activity with FlexShopper.

Those of you who follow these types of businesses understand the significant financial leverage associated with repeat customer activity.

We are doing a much better job of mathematically segmenting and focusing on these activities and we are confident these activities will increase moving forward.

Our view is the emphasis on credit quality, diversifying our origination channels and creating an appropriate repeat customer experience are very complementary strategies that can drive our strategic direction.

With all of that said, we are happy to take any questions.

(Operator Instructions) The first question is from Scott Buck, B. Riley FBR.

Rich, I know you said you didn't want to talk too much on stimulus benefits that you guys may be receiving.

But I was hoping you could give a little bit more color on maybe some of the customers of yours that are receiving enhanced unemployment benefits or onetime federal stimulus checks.

What impact that had on the quarter?

And what impact do you expect it to have on the third quarter?

Right.

Well, we don't really have insight particularly as to how they're receiving any benefit, although we do know roughly their income.

And so certainly, the vast majority of our consumers would have been eligible for the stimulus.

So as Russ mentioned, we did see a pretty big uptick in our early payments.

As you know, we can pay off our leases early.

And that is -- that had picked up in the quarter, so we suspect that's the case.

Moving forward, though, we -- once again, I want to emphasize, we've also been tightening our underwriting over time with new algorithms so I don't -- there's a lot of crosscurrents here, right?

There is the stimulus, which is helping us.

The unemployment is hurting us.

Our underwriting is helping us.

So we don't feel dependent on additional stimulus in order to run our business in a prudent rate.

But I don't really have any more insight other than the vast majority of our customers would have been eligible for the stimulus as outlined by the government.

No, that's helpful.

I appreciate that.

Second one for me, what's it going to take to drive the average acquisition or purchase price higher?

It looked like it was kind of flat with the last quarter.

Is that just getting retail outlets open again and getting some of those larger purchases going rather than online?

Or what's going to drive that?

Generally speaking, our retail partners have a higher ticket than our online.

And so yes, that mix shift probably was affecting us there.

We also have, as I think I mentioned in my prepared remarks, we've been focused more on some more segmentation in our marketing.

So we're trying to drive consumers to a higher price point that we think they can afford, obviously.

But I would say that in the quarter itself, it was probably the mix shift between the retail and the online that caused the flat performance.

(Operator Instructions) We have a question from Richard Deutsch, National Securities.

Congratulations on your initiatives you've taken during the quarter, they're quite exciting.

I have a couple of questions, and then I'll go back in the queue.

First of all, can you tell me what the churn was for the quarter and what the trends are in churn?

And what your thoughts are about that.

Rich, can you take that one?

This is Russ.

I'll take it.

So in terms of churn, so we're going to -- I'm going to take that from the perspective of what were repeat rates and how did it change during the period.

So obviously, as we talked about before, the direct-to-consumer FlexShopper.com customer has a higher repeat rate or a lower churn rate than the customer obtained through the brick-and-mortar locations.

So given that there is a mix shift there, we actually saw repeat trends pick up over the period as those customers -- online customers made up a larger part of the overall mix.

So another way to put that, just complementing what Russ said, is we have put in place in the last few months a more focused plan on creating more repeat customers.

I mentioned it in our prepared remarks.

And our business-to-consumer customer, the direct-to-consumer channel does tend to have higher repeat rates.

And so we are seeing a nice increase in our repeat rates, and that has continued even as we've gone through the second quarter into July.

So we're pleased with the ability for us to create repeat customer performance.

And as I mentioned in the prepared remarks, those are very profitable customers in that they've already demonstrated their credit quality and they're much lower acquisition cost per lease.

Are you doing marketing to the both groups equally, your B2B and B2C?

Or are you marketing more in the B2C?

We market to both of the consumer bases.

It's just the nature of it is if someone is going, let's say, to a tire store, they may not be as likely to come back to an online marketplace as someone who originally came in an online marketplace.

We don't -- certainly don't discriminate against them.

But we want to make repeat sales to anybody we can.

It's just the nature of the sport that have the consumers coming to our business, they're coming in from a different place.

And so it's more highly likely that people who come into the marketplace would be more likely to return to marketplace.

So then as your churn rate goes down, your acquisition costs go down also.

Is that...

Acquisition cost on a per lease basis over time would decrease, yes.

On a per lease basis, that's right because there's no -- I may not have done a great job in prepared remarks, but I have to emphasize that the whole strategy we have of increasing or improving our credit quality basically then feeds very complementary into this whole repeat customer strategy, right, because you have a group of people who are creditworthy, and you can continue to market to them at a much lower acquisition cost.

I'm going to use my second question.

Thank you, Rich.

Fintech has been hot for a long time.

And I was always excited about that third leg, which was the payment option.

Can you go into a little more color about it?

Because Wall Street is paying a lot of attention and paying big premiums for people that are...

I'm going to let Brad handle that.

He's kind of our resident expert on that and sort of pioneered it.

So go ahead, I'll let Brad handle that.

Yes.

So Rich, good to talk to you.

We're excited about that also.

And basically, we've taken a two-pronged approach to that.

One is our direct integration, our e-commerce payment method, which we have patents on, where we can integrate directly on an e-commerce partner site and the consumer can seamlessly check out with a lease.

And the other approach is to participate and partner with waterfall cascades, which we are diligently doing today.

And we feel that both are obviously great growth opportunities.

And in fact, we scored a win with just an e-commerce payment method in the second quarter.

And as I've mentioned, we're already doing at an annual run rate of millions of dollars in lease originations.

So we agree.

That's become increasingly important.

And even more so important in this COVID environment with everyone is [saying] has really accelerated online behavior of the consumer significantly.

Yes.

I think that's important for us to highlight is as the retail environment shifts to more online, we feel -- perhaps not uniquely, but certainly, we're in the competition on the online space, right?

We have our own online marketplace, which we're seeing good results from.

And we're partnering with retail partners that are more e-commerce driven.

So we believe that we're poised to take advantage of this wave of more electronic commerce.

That's pretty exciting.

Can you talk a little bit -- Waterfall's your main creditor, and I haven't heard that they've partnered with you.

Can you tell us a little bit about that?

No, I think there that may be a little bit of a vernacular thing here.

Yes, Waterfall Asset Management is our biggest liquidity provider.

I think what Brad was talking about was a waterfall as an application phase, right?

Like someone might -- a customer might come into a retailer and they may get declined by a retailer or maybe by like someone like Citibank or Synchrony.

And then we would be maybe the next in the waterfall, and that would be -- we would save that sale.

That was what Brad was referring to.

(Operator Instructions) Ladies and gentlemen, there are no further questions.

We have reached the end of the question-and-answer session.

I'd like to turn the call back over to management for closing remarks.

Well, great.

Well, thank you guys for all joining us today.

We look forward to speaking with you again on our third quarter earnings call.

So thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.