FlexShopper Inc (FPAY) 2020 Q1 法說會逐字稿

Greetings and welcome to the FlexShopper First Quarter 2020 Earnings Call.

(Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to our host, Jeremy Hellman of The Equity Group.

Thank you.

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 that 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 first quarter earnings call.

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

Russ is going to walk you through the results for our business, including financial details, and Brad is going to provide you an update on our business-to-business partnership operations.

Brad's also going to provide some detail on how we've mobilized our operations to effectively conduct business in the COVID-19 business environment.

I will conclude with a more detailed discussion of our view of credit risk, our direct-to-consumer marketing activities and a summary of our current strategy.

However, prior to turning the call over to Russ, I'm going to make some brief comments regarding the current impact of COVID-19, the broad-based economic slowdown and how it has affected FlexShopper.

We entered March with strong growth, which is reflected in our lease origination growth of 20.6% year-over-year for the total quarter.

However, that growth slowed substantially in the second half of March and throughout April.

This is due to a significant drop of consumers purchasing in our retail partner stores resulting from the shelter-at-home requirements across their geographic footprints.

Also contributing to the slowdown was the lower volume in our direct-to-consumer marketing in the second half of March based on our decision to prudently tighten our underwriting criteria as we assess the potential impact of the COVID-19 slowdown on consumer payment behavior.

Fortunately, we have not seen any deterioration in consumer payment behavior in March or April.

At the end of the quarter, percentage of leases being paid in a timely manner was higher in March of 2020 than in March of 2019.

This payment pattern continued as of the end of the month in April.

Timely payments were higher in April of 2020 than both April 2019 and March of 2020.

While it is certainly difficult to see the future, we are happy our credit quality has remained strong to date.

Now I'll hand the call over to Russ now to discuss the financial highlights.

Thanks, Rich.

A press release and investor deck on our website provides significant detail on the first quarter and trailing 12 months.

So I'll focus on a few high-level metrics and a few key items.

As a reminder, due to the seasonality of our business, the best metrics are ones that compare across similar time periods.

Therefore, we originated over 36,000 gross leases this quarter, up 20.6% from the prior year quarter.

Originations, or more importantly the growth in originations, is the best indicator of future revenue and revenue growth as we recognize the revenue from new leases over the 12 months following origination.

Net lease revenues and fees were up 8.8% to $23.7 million, which reflects the continued growth in originations from prior periods.

In addition, gross profit improved 16.4% to $8 million, with gross profit margin improving to 32% versus 30% for the prior year quarter.

In addition, our average origination value per lease improved from $470 in the first quarter last year to $475 in the first quarter of 2020.

And at the same time, we're able to reduce our average customer acquisition cost from $111 to $68.

Please note that it was $84 for the fourth quarter of 2019.

So continued improvement on that front.

Moreover, we finalized the warrant exchange this past quarter.

There are some costs associated with that exchange this quarter that we will not have going forward.

Moreover, the EPS impact of the deemed dividend related to the exchange resulted in an additional onetime loss of $0.04 of EPS, which is noted in our income statement.

In addition, as we stated in our press release last night, the unknown length and breadth of the COVID-19 situation resulted in us withdrawing our previously issued financial guidance for full year 2020.

And now I'll hand it over to Brad to go into more detail on the B2B business.

Thanks, Russ.

First, I'd like to address our response to COVID-19.

As a company headquartered in South Florida and subject to hurricanes, we have a solid BCP, or business continuity plan.

It was put to the test, and our team has done an excellent job in executing.

Today, most team members work remotely.

We have continued to maintain high levels of productivity and high levels of customer service.

So I'm very pleased to share that operationally, we have been business as usual, with additional thanks to our nimble technology and online model.

Moving on to B2B.

As we're all aware, retail has been hit hard by COVID and hence has adversely impacted our B2B originations due to store closures and reduced traffic.

Our tire partners are open as essential businesses, but origination volumes are significantly less.

On a positive note, we've seen our retail partners internally stress the importance of using our services to increase sales as primary credit finance companies decline more applicants.

We mentioned in our last call that we felt we had a strong pipeline of business.

And today, we feel just as confident, except these initiatives are deferred by retailers until their near-term crises are averted and some level of normalcy is achieved.

We believe that coming out of this, retailers' demand for our services will be stronger based on increased pressure for sales.

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 heavily 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.

Overall, we are optimistic that the COVID impact on our B2B channel is a deferral of B2B growth, and we believe it will come back stronger based on retailers' pent-up need for sales.

On another note, something that we've touted from the time that we started FlexShopper and is very relevant today is that we are diversified with multiple lease origination channels.

So while storefront retail is significantly impacted by COVID and influences our in-store business, we also have our online direct-to-consumer channel, FlexShopper.com.

This channel, which in our early years generated much of our growth, we control based on marketing spend.

We are only aware of 2 other companies in virtual lease-to-own that have direct-to-consumer e-commerce.

From our observations, they do not have the selection, brands or national retail drop-ship partners that we have.

We feel that as the in-store lease-to-own consumer is displaced and looks to shop online, we have a competitive edge with our robust lease-to-own e-commerce platform.

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

Thanks, Brad.

I'll remind you that on our fourth quarter conference call, we discussed the fundamentals of FlexShopper priorities, which are risk underwriting, liquidity and distribution.

Those elements enable us to maximize the return on shareholders' capital.

Russ has already explained that we are comfortable with our liquidity.

And in my experience in a recessionary environment, risk underwriting becomes more important than expanded distribution.

Therefore, I want to spend a bit of time to explain how we are looking currently at risk management.

As we communicated last quarter, we tightened some underwriting standards upon my arrival in October.

We also communicated in that call that we spent the rest of the fourth quarter of 2019 developing improved algorithms and anticipated moving back to a more rapid growth rate beginning in the first quarter of 2020.

Indeed, we were growing at a rapid rate through the first 10 weeks of the first quarter, and our improved algorithms enabled us to do that with an appropriate level of credit risk and the appropriate return on capital deployed.

With the sudden change in the economic environment associated with COVID-19, we once again moved to a tighter underwriting strategy using our improved algorithms.

In a normal environment, this would indicate we are booking a much higher quality lease asset at a lower volume.

However, it is not clear how much this may change if there is an extended slowdown in the economy associated with the COVID-19 shelter-in-place policies.

With respect to future credit risk, I gain comfort from the new algorithms and the tightened underwriting standards.

Additionally, I gain comfort from the type of product offer -- offering that we provide to consumers.

We lease products and not cash.

This makes the asset more stable as it cannot be immediately used to pay off another loan or to create immediate liquidity for a consumer.

In other words, our customers are actively shopping for a product they desire and has value for them.

Our average order value is $475, which is relatively small.

Leases have a short term life of 52 weeks.

We collect payments directly from consumers' banking accounts on a weekly basis, which results in a relatively small payment from a consumer at any one point in time.

Our average weekly payment required is less than $20.

Importantly, this weekly payment pattern also gives us a very quick read on changing consumer behavior and enables us to adjust to underwriting strategies very quickly.

In summary, I'm very comfortable with the advanced decisioning technologies FlexShopper uses for underwriting.

I'm additionally comforted by the profile of this small-ticket, high-payment-rate asset in a more challenging economic environment.

Now regarding the distribution of our assets or marketing, we are obviously looking forward to our retail partners increasing their volume as shelter-in-place restrictions are lifted over time.

However, we have no control over this timing or how quickly their consumers will return to purchasing.

Speed at which our retail partners' volume returns to a normalized volume is probably our biggest unknown in our outlook for the immediate future.

As Brad mentioned, we have active dialogues with all of our existing and potential partners.

We believe this retail volume will normalize and grow, but we do not have the exact timing of this retail acceleration.

Of course, we do have control over our direct-to-consumer marketing, and we are pleased with the results we had in the first quarter.

We continue to actively originate new customer leases at an attractive cost per customer, and they continue to perform well.

We are currently evaluating when we would like to reaccelerate our direct-to-consumer offerings.

Additionally, we have shifted a substantial portion of our marketing investments to stimulating our existing and former customers in order to increase their leasing activity with FlexShopper.

Returning customers are our most profitable segment of consumers, and we definitely want to take care of their needs particularly since their availability of credit from other credit providers has likely decreased in the past couple of months and will probably remain suppressed over at least the next several months.

We are searching for the right time to accelerate FlexShopper's growth rate.

However, in the very near term, we're going to err on the side of caution and continue to market to consumers in a prudent manner with tightened underwriting standards.

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

(Operator Instructions) Our first question comes from Theodore O'Neill with Ascendiant Capital Markets.

Thanks for all that helpful detail on the average weekly payment.

It was very interesting.

Do you have a view on what percentage of your customers had to close their doors?

And can you comment on sort of the -- your geographic footprint relative to the 40-or-so states that are going to sort of try to get back to business now?

Do you have a footprint there separate from, let's say, the footprint of Connecticut or New York where we're still all in lockdown?

Yes.

So I'll kind of broadly answer your questions.

So when it comes to tires, where we've had -- our model has worked really well in that vertical, they've been considered essential businesses, so they're still operating.

But obviously, the impact there is reduced traffic.

What we've seen as regards to a category like furniture is that many of those have actually closed.

As far as geographic concentrations, basically our business kind of follows the most populous states.

But obviously, our retail locations up in the Northeast are slightly more impacted.

Fortunately, again, there we have a lot of tire stores, and they are considered essential services.

So I guess another way to try to answer that question, and tell us if we don't, on the business-to-consumer side, we have a national presence, and it generally distributes as a national population does.

On the business-to-business side, as Brad was saying, we do have some geographic -- we don't have geographic restrictions, we just have partners that are focused geographically, and we do have some concentration in some of the states like New York, which would -- even though they're open, their stores are open, traffic is way down.

Correct.

Correct.

(Operator Instructions) Our next question comes from Steve Emerson with Emerson Investment Group.

Congratulations on your very prudent management.

Do we have any kind of flavor as to what proportion of our borrowers or renters are in -- work for organizations that are completely shut down like restaurants, hotels, et cetera, or risk in terms of employment?

Well, we do not capture that data on -- in our underwriting, so we do not have a figure for you there, Steve.

We -- I guess the best way to express how this is working is we do have a customer base that's continuing to pay us, and they're continuing -- and we're not having any upticks in our working sessions with consumers.

As I think we said in previous calls, when we have -- part of our collection efforts is we want to keep consumers in their leases, right?

We want them to get the lease that they -- the product they lease from us and they eventually want to own.

So we have a kind of a workout process with these people.

We have not seen an increase in that either.

So I can't answer your question because we don't capture that data, but I can just say that the -- to date, through the end of April and the first few days of May, we've just not seen any deterioration in performance that would indicate that they cannot pay us.

Our next question comes from Scott Buck with B. Riley.

I'm curious on the direct-to-consumer business whether you've seen a shift in the items that are being purchased or rented, whether it skews more towards a work-from-home or a homeschooling perspective and then whether or not some of those larger-ticket items like computers and maybe furniture you guys can earn a little better margin on.

Well, it -- we did some analysis on that.

And we've always had a nice gaming business, if you will, in our marketplace, our direct-to-consumer marketplace at FlexShopper.com, and that has remained very strong.

But we've also seen a pretty big uptick in laptops and PCs, which we don't know for sure, but I can probably attribute that to a little bit more homeschooling that has to happen or work-from-home environments.

But we've definitely seen an uptick in those electronics.

We're not taking the margin.

We don't -- as you may know, right, we don't have the inventory, so we're not -- that's not a margin for us.

We're making our money primarily on the lease itself.

So we're not particularly concerned with what item gets leased but we did -- we figured that, that would be a question that people would want to know.

But yes, we're definitely seeing a skew towards more of the electronic side of things at home.

That concludes our question-and-answer session.

I'll now turn it back to management for closing remarks.

Thank you for joining us today.

We look forward to speaking to each of you again on our second quarter earnings call.

Thank you.

This concludes today's conference.

All parties may disconnect.

Have a good day.