Sezzle Inc (SEZL) 2020 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Sezzle Inc. annual report conference call. (Operator Instructions) I would now like to hand the conference over to Mr. Charles Youakim, Chief Executive Officer. Please go ahead.

Thank you. Good morning, everyone, or to those joining us from the United sates, good evening. And welcome to the Sezzle Inc. 2020 annual report call. Name is Charlie Youakim, the CEO and Executive Chairman of Sezzle, and I will be leading the presentation today. I wanted to welcome all of our investors who are listening in. We appreciate your support with a keen focus on providing a great return on investment for our long-term holders that I hope you'll see in this report.

I'm joined on the call by our CFO, Karen Hartje; President, Paul Paradis; and our Head of Investor Relations, Lee Brading.

Now I'll move on to our presentation. If you haven't already had a chance, you can find our presentation posted on the ASX website if you'd like to follow along. And for those of you that are there already, please open your presentation to Slide 3. I will review our agenda.

Today's presentation will discuss the following topics: first, our highlights and mission; next, we'll cover the 3 pillars of innovation -- or 3 pillars for us, expansion, innovation and empowerment; and finally, we'll talk about our 2020 financial performance and our outlook for 2021. Let's get started.

First, let's go over our scorecard on slides 4 and 5. We have some great numbers to report here. If you look at 2020 compared to the prior year, you find that we more than tripled our merchant sales through our systems, reaching USD 856 million in volume, ending the year at a run rate of nearly $1.4 billion. This increase in UMS led to a nearly 4x increase in total income, which grew from USD 15.8 million to $58.8 million.

We also saw our total income percentage of UMS ride from 6.5% to 6.9%, while our net transaction margin made significant strides year-over-year from 0.2% to 1.4%. Finally, we also improved our net loss rates by 20%, reducing them from 1.5% to 1.2% year-over-year.

We're going to remain focused on growth as our primary driver. We make smart decisions along the way to improve our net transaction margins. Key metrics also made significant gains. We grew our active user base from 900,000 users at the end of 2019 to more than 2.2 million active users at the end of 2020, representing a gain of 144%. We also grew our active merchants at a similar pace, nearly 27,000 active merchants at the end of the year. The pace of additions for both groups has also been accelerating.

Finally, our customers are proving to be highly engaged. Our aggregate user frequency and repeat usage numbers have increased steadily year-over-year, which speaks to the love the customers have for our product.

On Slide 6, we want to get our message across loud and clear that we have a purpose [in mind] what we're doing as a company, which helps to invigorate our team as we march forward. Our mission statement is to financially empower the next generation, and our mantra is the way forward.

We are an ESG forward company, the stakeholder approach to doing business rather than the bottom line approach. We think the investors out there should be aware of that, not because that we think it'll hamper our ability to deliver on results but because we think it'll enhance our ability to [move] forward.

The launching of product extensions like Sezzle Up help our customers with credit building because it's the right thing to do for them. It's also what we know they want and what they should want.

Slide 7 gives you some quick (inaudible) of the feedback that we receive every day from our customer base. I'm just going to read one of these quotes because it speaks to the power of what we have built. Myriah says, "Sezzle has allowed me to 'soften the blow' of making one large payment... In my case, it is an item I'm hoping further eases my stress and anxiety caused by current events."

We're extremely proud of what we've built and how it helps our customers. We're going to keep on looking towards improving our positive impact.

Efforts (inaudible) on Slide 8 exhibits some more examples of our ESG-forward approach as a company. In 2020, we became the first buy now, pay later to achieve Public Benefit status. We also went above and beyond carbon neutrality. We first implemented a carbon offset program to achieve neutrality, additionally committed to planting a new tree for every new active user in coordination with Trees for the Future.

We're also really happy to work with merchant partners, initiatives for the good of our community, as exemplified by our partnership with administrative supply to help get masks and professional clothing into the hands of those looking for a new start during COVID.

I'll now hand over the presentation to Paul Paradis, our President, to cover the next section.

Thanks, Charlie. I'll be drilling into our growth a bit more. So if you want to turn to Slide 11. I'm going to be highlighting our most recent consumer statistics, areas of merchant growth. New partnership opportunities, international expansion and talk a little bit more about our recent capital raises.

So going to Slide 11. A key area of focus for us over the past year has been expanding our marketing capabilities to attract more new customers and to better activate our existing customers. Veronica Katz, our Chief Revenue Officer, has brought a considerable amount of marketing experience. We hired a new VP of Marketing, Penelope Holt. She started and led a marketing consultancy for many years, working with companies like eBay, Bill Me Later, PayPal, and BorrowersFirst. And we added several other key members to our marketing team, primarily on the consumer side.

The team executed our first major marketing campaign in Q4 called Save the Holiday, which by all accounts, was a major success. During this campaign, we more than doubled our pace of daily app downloads and social media followers, and the campaign led to the acquisition of several key merchants who are really excited to gain additional promotion to our user base during the holiday season.

Turning to Slide 12. We continue to see very strong usage of our platform across all metrics. Monthly cohorts continue to transact more frequently than previous cohorts at the same stage of maturity, part of the increasing utility that our platform provides as we gain acceptance at more merchants. We also continue to see very strong repeat usage rates as a percentage of our total order volume with close to 90% of our order volume coming from existing Sezzle users in Q4, which again, points to the stickiness of our product and strong loyalty that we're developing with our customer base.

Going to Slide 13. We continued our rapid pace of merchant acquisition in 2020, adding close to 17,000 new merchants to our platform in the calendar year. As of the end of January, we had over 29,000 active merchants transacting with Sezzle. We also make a very conscious effort to partner with a more diverse set of merchants than many of our competitors do. Whereas some of our competitors are laser-focused on fashion and beauty, we want to enable our customers to use Sezzle for any purchase type. So we put a lot of effort into other popular shopping categories like vitamins and supplements, health and wellness products, and electronics.

Going to Slide 14. Since our IPO in 2019, we've been pointing to enterprise retail as the untapped segment in the U.S. that we're going to throw a lot of our weight behind. I'm pleased to say that we've made great strides in consistently acquiring larger and more notable merchant partners since then.

Bass Pro Shops is one of the largest sporting goods retailers in the U.S. And we plan to expand to their sister company, Cabela's, very soon, which is similar in size. UNTUCKit, Ministry of Supply, Thursday Boots and Pure Hockey, these are all merchants that were working with competitors of ours. They decided to offer Sezzle instead after receiving superior service and results.

Several of the logos you see here represent some of the most influential brands in Canada, across sporting goods, fashion and health products, including the Last Hunt, Popeye's and SoftMoc, to call out just a few. Our partnership with Target was made public towards the end of 2020, and that engagement continues to go very well. And our enterprise pipeline has increased exponentially since we brought Veronica in and assembled an enterprise team behind her. So lots of good news on the merchant acquisition front and much more to come in 2021.

Turn to Slide 15. Acceptance is really everything for us. And acceptance by more merchants in more places is how we acquire more users and turn them into loyal customers. So it's extremely important for Sezzle to be an omnichannel solution. E-commerce has been very good to us, and it continues to take more share of total retail spend every year. And the pandemic certainly accelerated that shift exponentially, but the vast majority of retail spending still occurs in store. So this is a major push for us. We're currently available in store at a handful of merchant partners, including Gamestop and Pure Hockey, but we will be expanding our in-store capability significantly in 2021, led by our virtual card solution.

This solution makes it extremely easy for any merchant that accepts credit cards today to accept Sezzle with virtually no technical lift. We rely on several strategic partners to power this virtual card solution, including Visa, Mastercard, Apple and Google.

And we have many other strategic partnerships that have recently come online that will help us expand acceptance in other ways. BigCommerce and Wix, our 2 large e-commerce platforms that we were added to this past year, we announced our partnership with Ally Bank last year to expanding the long-term installment financing, and most recently, we made public our partnership with Discover, 1 of the 4 major card networks in the U.S. Initially, Discover will be selling Sezzle into their merchant network, but we do hope to expand the capabilities of that partnership over time given Discover's extensive payment infrastructure, customer base and lending capacity as a bank.

Going to Slide 16. Canada is our first market outside of the U.S., and our team there has done phenomenally well. UMS increased more than 1,500% year-over-year. Active consumers increased over 800% year-over-year, we're now live with approximately 1,500 Canada-based merchants. This market is representing a larger percentage of our overall UMS as a company every quarter.

We've mentioned our forays into India and Europe on previous investor updates. And while these markets are not material yet, we are pleased with the development of both regions thus far. Our Indian team launched our product in July 2020, and our European team went live with our platform in December. So both teams are still in the early stages, setting up the appropriate infrastructure and optimizing product market fit, but they're progressing quite nicely.

We continue to evaluate other markets, too, and our approach will likely be very similar in these other markets when we expand, finding the right team, providing the team capital and support, and then scaling once product market is achieved.

And then on Slide 17, to fund all these expansion efforts, we've had 2 major capital raises in the past 6 months. We raised USD 60 million in equity capital on the ASX in July, which has been used in a multitude of ways. But a good portion of it has funded the acquisition of top talent across the organization, especially in product sales and marketing. And more recently, we closed on a new $250 million receivables facility led by Goldman Sachs, which provides for lower borrowing costs, increased funding capacity and a longer-term contract.

And now I'll turn it back over to Charlie to go through the innovation portion of our presentation.

Thanks, Paul. Please go ahead to Slide 19, where we'll discuss some of our innovation work. 2020 was a huge year in innovation at Sezzle, which leads to 2021 to be a big year for us to grow these innovations out, being the [proof] of that labor. Headliner for us is of course, Sezzle Up, which I touched on earlier. Fully launched the product in November. While we haven't released any uptake data, we can tell you that we're excited about the product. We know that 50% of U.S. Gen Z and millennials want a credit-building Buy Now Pay Later. By offering this product, we're building what they're telling us they want. It also would be because it's the right thing to do. We're treating our customers like we treat our own kids. We want them to join Sezzle Up so we can build their credit score with our tools.

Our company has an additional win here in that the primary payment method for Sezzle Up is a direct debit via ACH. By moving our customers over from card rail to banking rails, we're able to reduce fees on those transactions by around [150 basis points]. We created a product in Sezzle Up (inaudible)

On Slide 20, we touch on 2 other important innovations created in 2020 with Sezzle Spend and our virtual card solution for in-store, which Paul already touched on a bit. Again, both products were being built during the majority of 2020. The recent launches has a much bigger impact in 2021 than it did in 2020.

Sezzle Spend is a reward system that also doubles as a merchant marketing tool. Via Sezzle Spend, our merchants are able to create programs that direct Sezzle towards their brand. As you can see in the screenshot on the slide, this user has $5 in Sezzle Spend that can be only spent at Kappa. On the far right, you can see the marketing in action with our Thursday Boots campaign highlighting the use of Sezzle Spend to drive shopper engagement (inaudible) Thursday Boots. That sort of marketing tooling has proven to be a differentiator for us in our discussions with our retail partners.

To help our retail partners, we push forward with an omnichannel solution via our virtual card offering. Our Sezzle virtual card is a persistent virtual card that (inaudible) with our users. I think a persistent card is important because it allows the user to add the card to their Apple and Google wallets, simplifying store pay purchases. Now all our brand partner has to do in order to accept Sezzle payments in their brick-and-mortar locations is tell the shopper that we're accepted there.

On Slide 21, we touch on a couple of innovations that revolve around our partnership's approach to doing business. We partner with InComm in order to enable gift card purchases for our user base. We partner with Ally in order to enable long-term installments within the Sezzle platform. Long-term solution will launch in the first half of 2021. That solution enhances our value prop to retailers with higher AOVs or larger ranges of AOVs. The long-term solution also gives our shopper more options, which adds the value of the Sezzle platform for them.

In the next section, we discuss empowerment and what we're doing to support the empowerment of our customers. Please flip ahead to Slide 23.

On Slide 23, we're citing our commitment to our community. As mentioned earlier, we follow a stakeholder approach to business and endorsed our public benefits corp. status. Some examples of that approach can be seen in actions. So my favorite initiative is the Sezzle Scholars program. We launched a partnership with University of Minnesota. This is a program where we're able to support a talented individual through a university education and technology. Started off the program with a young superstar. Jonathan Olaleye is the first recipient of the award, and I'm sure he's going to do some special things in his future. He's a National Merit Scholar. He's already interested in entrepreneurship. I think many of you may be investing in one of his companies in the future based on what I can see from his potential. We're really happy and excited to support him.

We also work hard for our own team as they work hard for all of our stakeholders. On Slide 24, we have a few examples outlined. In 2020, a group of leaders within the company formed a committee to support DEI initiatives at Sezzle. Their focus is on enhancing DEI in our company through representation and retention, the creation of an inclusive experience and by making external impact. Through these types of efforts and by giving our team challenging and rewarding work, we're able to maintain an amazing level of happiness within our company. We're currently averaging 95% happiness over the previous year. Also expanding our rewards to our team through a new incentive program launched in 2020 that promotes ownership in the company via goal-oriented rewards.

On 25, I think you may be familiar with if you've been following the company, I speak to all the actions we took to protect our stakeholders and our company during COVID. Hardship requests have maintained at a relatively low level through COVID, which I think speaks to how our shopper uses our system. If they don't have line of sight to income, don't make the purchase, working exactly how we'd hope to be used.

Before I hand over the presentation to Karen Hartje, I'll touch on a couple more topics, regulation and risk management. So please flip ahead to Slide 26. (inaudible) on the regulatory front, I have personally been active on a roadshow with state regulators in the U.S.A., educating them on our business and how consumer-friendly we are. In most cases, we surprised the regulators with our approach in a very good way. The roadshow has been working.

We plan to continue to move forward with the regulatory education, and we've been welcoming our Buy Now Pay Later cohort of companies to join us on this path. Our viewpoint is that the biggest risk for a regulatory issue is a bad actor putting on a Buy Now Pay Later hat and dragging us all down. If we set standards together, we can all work towards raising the bar (inaudible) future entrants (inaudible) the sake of our customers.

Finally, we wanted to point out the amount of work that goes into building out our own proprietary fraud- and risk-detection systems, building valuable IP within the company that is helping us make an incredible impact with our product. This type of work is creating sustainable value for all of our stakeholders to make us proud.

I'll now hand over the presentation to our CFO, Karen Hartje, to go over the financial results. Karen?

Thanks, Charlie, and hello to all. Before I start the financial update, please note that our financial statements are prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars. Additionally, the financial numbers presented are preliminary because the audit, which is being conducted in accordance with the standards of the U.S. Public Company Accounting Oversight Board, PCAOB, is still in process.

Going to Slide 28. The positive UMS that Charlie has already shared is reflected in total income. 2020 total income was $58.8 million, 3.7x total income of $15.8 million last ye

ar. Merchant fees comprised 81% of total income for 2020, similar to 2019. Along with total income growth is growth in net transaction margin on a dollar and rate basis. Net transaction margin dollars totaled $12.4 million in 2020 versus $598,000 in 2019, reflecting an improvement of 1,975%, a number I could say all day long.

(inaudible) to 1.4% in 2020. From 2018 to 2019, the net transaction margin improved from negative 1.1% to positive 2.2%, so we picked up virtually the same percentage point increase in 2020 as we did last year. This makes for a great chart.

For more on net transaction margin, let's move to Slide 29 and walk through the components with the focus on rates as a percentage of UMS. Sezzle income, which is the purple bar on your left, was 5.8% versus 5.5% in 2019. The increase in Sezzle income rate reflects higher repeat usage with our growing active customer base and the mix of merchants that are still predominantly comprised of small to medium-sized businesses.

As a percent of UMS, cost of income improved by 0.5 percentage points to 2.6% in 2020 from 3.1% in 2019. Most of the improvement was in payment processing, which dropped to 2% in 2020 from 2.4% in 2019. Reductions in payment processing reflects scaling of the business as well as, more recently, migration from card to ACH processing due to our customers' adoption of Sezzle Up.

Net transaction loss improved to 1.2% in 2020 from 1.5% in 2019, reflecting favorability of 0.3 percentage points. Actual and expected losses improved to 2.3% in 2020 from 2.6% in 2018, while account reactivation fees ticked up slightly from 1% to 1.1%.

Year-over-year improvements in actual and expected losses were driven from higher collections resulting from higher repeat usage that we've previously spoken to. Something that we talked to last half of the year was the various stimulus measures enacted by the U.S. government, such as the CARES Act that also resulted in improved collections.

Net interest expense was basically flat at 0.5% year-over-year primarily due to the minimum utilization requirements of the line of credit in place at year-end. Hopefully, you all saw the announcement of our new $250 million line of credit with Goldman a couple of weeks ago, and we'll review more details on that in a minute. We end 2020 with a net transaction margin of 1.4% compared with 0.2% in 2019, again, reflecting an improvement of 120 basis points.

Moving to Slide 30. Slide 30 shows the year-over-year comparison of the key components of net transaction margin, both in terms of dollars and percent of our underlying merchant sales. The key message here, which bears repeating, is that in addition to the 120 basis points improvement in rates, our margin grew to $12.4 million in 2020 from $598,000 last year.

So we always get the question, where do you think this is going? Our answer to that is we expect compression in the merchant fee rate as we bring on enterprise clients. We also expect continued improvement in payment processing cost as we continue to migrate transactions from Card to ACH. This is our most significant cost opportunity.

As we grow our portfolio, increased repeat usage leads to improved collection rates. We also have a strong underwriting program. We have a relatively low-risk product with a low AOV and mitigating them payment feature and short duration. And to a large extent, we can control our own destiny here. Funding costs, as you saw in the previous slide, is really the smallest element in our margin. With the Goldman line, we'll see improvements here. But again, the short duration of the product is relatively capital-efficient versus traditional longer-term consumer-lending models.

On Slide 31, you can see that we ended the year with $84.3 million in cash and cash equivalents with $40 million drawn against the line of credit, which reflected the minimum utilization requirement. We also had $24.3 million of unused excess borrowing capacity against our line at year-end.

We've been busy over the last year, raising capital to fund future growth. We raised $58.3 million through our July and (inaudible) equity fund raise. A couple of weeks ago, we refinanced our receivables funding facility with a new $250 million line of credit with Goldman Sachs as the senior lender and our long-time funding partner, Bastion, taking on the big piece.

Details of the agreement are included in our subsequent events footnote to the financial statements. A few of the highlights of the funding facility are as follows: It's a 28-month maturity that will take us through mid-June 2023; half of the $250 million is committed, while the remaining half is available for expanding our funding capacity; the interest rate is LIBOR plus 3.375 for the Class A lender and LIBOR plus 10.689 for the Class B lender with a LIBOR floor of 25 basis points.

Also disclosed in our footnotes are the terms of the line of credit that was replaced. The key differences are in line size, minimum utilization, requirements and rate. The line increased from $100 million to $250 million. In our prior funding facility, there was a $40 million minimum utilization requirement. There is no minimum utilization requirement in our new line of credit.

In the prior funding facility, the rate was LIBOR plus 7.75. With a LIBOR floor of 175 basis points, we've effectively brought the rate to 9.5%. You can see why we're so excited about this new line of credit is it lowers our borrowing costs, extends maturity and increases capacity.

In terms of other funding sources, we continue to see growth in our Merchant Interest Program. Under this program, merchants can elect to defer payment from Sezzle on their accounts payable and, in return, earn interest. The interest paid to merchants is less than the cost of funding under our line of credit, and service is an arbitrage strategy to reduce total interest expense. Our line of credit stands behind this program. Details about this program are also disclosed in the footnotes to our financials.

As of the end of 2020, we had $53.5 million in merchant interest-bearing accounts payable versus $10.1 million the prior year. The rate on this program at year-end was LIBOR plus 3%, which currently stands. We consider this program a win for Sezzle and a win for Sezzle merchants. With the line of credit and merchant payables as sources of funding, we do not use equity capital to fund our receivables growth. We believe our current capital position supports our growth expectations as each incremental dollar of capital supports $14 of UMS.

Moving to Slide 32 and speaking of growth expectations. During 2020, we provided guidance that our annualized UMS run rate would hit $1 billion by year-end. We hit an annualized run rate of $1.36 billion by year-end. We are now providing an outlook of $2.5 billion annualized UMS run rate by the end of 2021, about AUD 3.2 billion.

How are we going to get there? Well, we're off to a good start. January '21, UMS totaled nearly $118 million, setting another record month for the company and 65% higher than the monthly average UMS for 2020. With the additional equity proceeds raised last summer, we're continuing to invest in sales and marketing as well as product enhancement and expansion to grow UMS. We're excited about the start of 2021. And for many reasons, just like you, we are looking forward to what the year has to bring. Thank you for your time today.

At this point, I would like to turn it back to the moderator for Q&A.

(Operator Instructions) Your first question comes from Phil Chippindale with Ord Minnett.

My first question is for Charlie. Just looking at the January 2021 performance. That was extremely strong at a UMS level and an increase on November and December, which I don't think I've actually seen in Buy Now Pay Later before. So can you just talk a little bit about the dynamics there. Customer number is obviously increasing, but it looks like usage was up meaningfully. And I know it's only 1 month. I don't want to dwell too much on it. But yes, just be interested in what's happening there to drive such a big jump?

Yes. I think we are having acceleration in the business across a number of metrics, user counts, merchant count. But I think some of that does play into this (inaudible) this government stimulus pullout? And as we know with the stimulus, we saw this earlier in the year or in 2020, as stimulus check goes out, it tends to get put to use. But I think some of January's volume plays into that.

Just turning back to the financial result for a second here, probably a question for Karen. Your net transaction losses were a little bit higher in the second half than the first half. And it looks like that was mostly attributable to higher gross bad debts. Can you just talk a little bit about what drove that increase, if there's some seasonality we should be aware of? And then a follow-on question, if I may. Looking forward, would you expect bad debt to continue to trend down as repeat customer usage continues to rise?

Phil, I think that's a great question. Customer -- I think the bad debt will trend down as usage goes up. But the fact of the matter is, we're almost to 90% in increased usage. So I think that we're going to see kind of diminishing return of that opportunity in the future. So with that being said, as we look at the year, I think, of the year in kind of like 2 halves. The first half, we saw the impact of the stimulus programs. And we also had made some underwriting changes early on in anticipation of a COVID impact, which really never materialized. And I think if you put those 2 factors together, it was about a 40 basis point improvement in the first half versus expectation.

You're right. We always do see seasonality from the first half to the second half. And I think definitely, that was the case this year. It was the case last year, and honestly, it's been the case every business I've been in with a consumer credit portfolio. So I think between those 2 things, the first half being so unusually strong and the second half having the seasonality impact, where, over the course of the year, kind of evened out.

Okay. I might just turn to Paul, if I can. Just wondering if he could give us a comment on the competitive landscape as he sees it. Paul, you're obviously heavily involved in the sales process. Are you seeing an impact from the introduction of players like PayPal and Shopify in space?

Good question, Phil. The competition has been fairly steep since the beginning, and I haven't seen much change. PayPal, for the most part, just added this option within their wallet, and I think they're having to go out and convince merchants to promote it, right, on product and part pages, which I haven't seen much of yet. I'm sure they are.

Shopify, outside of the announcement with Facebook and Instagram extending Shop Pay to that platform. I'm not aware of Shopify selling their payment option outside of the Shopify ecosystem. And it's basically the default card processor within the Shopify ecosystem. You can choose other card processors. So what I'm saying is they don't really actively go out and sell that product into the market too much. So those 2, specifically, have an increased competition significantly since they launched products. But we'll see where it goes.

Okay. Just 2 final questions, if I may, for Charlie, I just wanted first of all, return to the gift card offering. Can you give us a sense of what your expectations are there and maybe a sense of the progress that, that offering's had so far amongst your customer base? Is that something that's sort of heavily resonating? Or is it still very much early in the process?

I think it's early in the process, Phil. I mean, it's not a heavy percentage of UMS. We really don't work to try to drive it at such high (inaudible). Of course, we try to make every product (inaudible). If you look at what we're trying to do with the company, it's trying to grow (inaudible) mixed in. How we'd view the gift card offering is more of a optimization. It's trying to make the consumer's experience better within our platform. It also helps create conversations for our business development teams so we can show the impact. There is interest levels, different merchant partners that we don't have direct relationships with at the moment. So it's a product that we think is important towards enhancing the platform. Really, we're more focused on items that can differentiate us to grow user base or UMS beyond current existing users on the platform.

Okay. Last question from me. Finally, I suppose there has been some suggestions in the press that ZipCo is considering its secondary listing in the U.S. Is this something that you guys have considered? Or alternatively, is it something that you would consider?

Well, it's definitely something that we would consider. I mean, we're in the U.S. It's something we look at. I mean, that case with a number of different initiatives or possible initiatives within the company. We try to think what every type of lever that we have in our control and what it might do to the impact of our growth moving forward. So it has come into our consideration set. We are weighing pros and cons of it but nothing at this moment.

(Operator Instructions) Your next question comes from Tim Piper with RBC Capital Markets.

Just the first one on your outlook statement and that target for the year-end. Obviously, when we started to put out a year-end annualized target last year, you smashed it by something like 40%. Can you give us an idea of how you build up to that number and what's sort of involved in that? Are you including volumes expected from the Ally partnership? Can you just provide some detail on the buildup to that kind of target? Because it effectively, it's end of the year, a number of months away.

Sure. Karen, do you want to touch on that?

Sure. I'll talk about that. As you might imagine, we went through a pretty rigorous budgeting process for 2021 that we concluded and presented to the Board in January for approval. A part of that process is we meet with all the revenue leaders. We sit down, and we chart out what the year is going to look like based on historical trends and also based on their knowledge of what's in the pipeline. And so we build a plan according to that. And we do it on a monthly basis. We take into account average order value, repeat customer usage, all the standard metrics that you would expect to kind of build our plan. And then we forecast off of that.

Okay. Understand. Maybe asked another way, how much do you sort of think Ally could contribute to that number?

We're not really sure how much Ally is going to contribute since we haven't launched it yet.

Okay. So second question, just back on the provisioning. Take your point around seasonality. But if we're kind of looking at the trend in the provisioning rate, it obviously came down in the first half of '20 significantly. I think you alluded to obviously government stimulus, et cetera. Basically in the second half, going back above where it was in 2019. Is this -- should we be reading this into that's now back to a normalized type level? I mean, looking at the breakdown you receive with this hasn't been a significant increase in the percentage of past-due receivables or anything like that. I mean, how do we read into that over the next 12 months?

How I would read into that is, again, I think what we saw in the first half of the year was really unusual in terms of -- I think it surprised everyone, it even surprised us. In terms of the performance that we saw in collections. And with COVID, it was just kind of a strange year and a strange time, I would say. I feel like, again, I said it, I believe it. I feel like this is really within our control in terms of our underwriting strategies and how we manage the business. And so we have a low-risk product. And so I think if you look at over time and you look at the full year rate, I think we can improve upon that going forward, but there will be seasonality.

Okay. One of the things you note in the report is a comment around expansion of universe testing in the underwriting process. Can you just explain -- that's I think, an explanation of sort of the trend in provision rates. Can you just explain that?

Sure. I think that this is something that we've done in the past, well, in fourth quarter as we're bringing on new merchants. We're also -- it's a big volume period, and we're doing testing there because we have a good sample size, frankly. And so with our different credit line management assignment strategies, we do testing in the fourth quarter, and as a result, we open up a bit to see the impact of that. And I think we saw a little bit of that during the holiday season.

Okay. And just one last one maybe for Charlie or Paul, just around the Discover partnership. I mean, we kind of see an announcement per week from a Buy Now Pay Later provider about a partnership with either a process or a distribution channel or et cetera. I think can you just talk about how different Discovery as one of the payment networks compared to, say, Visa and Mastercard, and why you think it could actually deliver some scale in the enterprise space?

Yes. Sure, Tim. If you look at the U.S. networks, Visa and Mastercard are just 2 networks. It's what their business is. And they stay out of the rest being they partner with banks on issuance and merchant acceptance. Discover and Amex are both different. They take on merchant acceptance. They take on issuance themselves. They are the bank behind the scenes so a bit more of an Apple to the IBM. They actually take everything in-house. So when you look at our company or when we look at our company, Sezzle, we look very much like Discover. Do all the same things. Do merchant acceptance. We do issuance. We take on the risk, backed by the bank behind the scenes. So when we look at (inaudible) lines up the best with us, Discover does. That's -- I think one of the things that pops out the most to us is that they also do target typically younger consumers for their platform, and we do as well. And so there's just so much alignment, I got really excited. It's about the partnership with Discover.

Additionally, they own ubiquitous rails in the U.S., and that helps with getting our product turned on. And that was an exciting part of the partnership for us that we could potentially take advantage of that. And they do have relationships with the top-300 merchants in the U.S. It's a relatively big part of the partnership because, as you know, they've been trying to push into enterprise, and we wanted to do everything in our power to enhance that.

So that's -- I think looking at Discover, they're the perfect match in the network world for us. And we just think that there's so much that makes a lot of sense here. Paul, is there anything else you thought what you were touching on?

No, I think you nailed it. I think I'd also add that they like to get very creative with their rails, too. I think because of that kind of closed system that they have, they can make a lot of decisions unilaterally that other networks can't. And so I think there's going to be a lot of opportunities to work with them, to leverage their infrastructure because they can make those decisions unilaterally instead of relying on partner institutions to make those decisions with. But I think otherwise, you nailed it, Charlie.

Your next question comes from [Nick McLean with Sari Asset Management].

This one's for you, Charlie. Firstly, I wasn't going to ask this, but Phil, good question in terms of the dual listing. Why would you even consider a dual listing? Is it to raise money at a higher price? Or is it more just for showing the U.S. market that you're here?

I would say, if you look at the pros and cons, and this is some of the things we've looked at, we get a ton of press in Australia for the company through our listing. And one of the thoughts is, if we did have a U.S. listing, we could raise our level of exposure within the U.S. And if you look at who's watching like the CNBCs and Squawk Boxes of the world, those are seat suites at retailers, which is positioning exposure to them through those types of coverage, good thing, right? But that's one pro. Another pro would be...

Sorry, Charlie, can I -- sorry for cutting you off. Just to add to the question that Phil started. Can I ask that question again in the context of what Afterpay has just done in terms of their transaction with dual listings and all the rest of it?

I think we focus more on our company, I guess. What exactly about their transaction, did you...

Well, it (inaudible) the U.S. versus other listings and that side of things?

And what about them?

Well, actually, we -- yes, so we run a recent transaction. Sorry, go on. Sorry about that.

I'm just going to go through the pros and cons from our perspective. I think that's best way I can lay it out. The other pro for us is the U.S. investor is really starting to become much more aware of the sector. We can probably think one of our complementary Flash competitors in the U.S. with a firm in there for IPO really raising exposure with U.S. investors. And if you get U.S. investors on board, of course, that increases demand sort of thing. The downside, of course, more work you got to have dual listing and all the capabilities to do that. And another downside is liquidity split because now you're on 2 markets. That are the pros and cons that we weigh as a company. No decision from the team at this point, but that's what we're looking at in terms of weighing the decision.

Okay. And then my next one is, which I've asked you a few times before. PayPal is obviously making some headway, even though it's still small in a big market. How are you -- are you seeing them at all at the moment? And more importantly, how do you think it plays out over 5 years for Sezzle?

Sure. Paul, do you want to touch on that?

Sure. To be honest, we haven't seen them much yet. They're a large APM. And I know they're out there talking about their product, so I'm sure we'll see it more. I think the challenge is to be -- to change the perception of who you are, right? I think one of the benefits we have is that we're a Buy Now Pay Later company. And when a customer sees us at checkout, they know what they're getting. And I think it's hard to rebrand yourself to the company or to change the perception of what you offer overnight, right?

And I think, frankly, it's going to be hard to offer a great product at a much lower rate. They've come into the market pricing it the same as their existing card gateway. And I think you're going to have going to have to change how you do things as a result of that, whether it's on the approval side, conversion side, et cetera. So I haven't seen them in market much yet, no. When we're talking to merchants, I hear about other competitors more often than PayPal.

And in -- Your question about where we see ourselves in 5 years or how do we see it playing out in the next 5 years. I mean, we're going to continue listening to what the customer wants. And I think you saw that with Sezzle Up. That's a really unique product that is getting a very positive reception in the market. And we're just going to continue offering features and functionality that differentiate us to the customer to the merchant. And I think because of our size, frankly, relative to a PayPal, we're going to be able to do that more quickly than PayPal while. So we'll just continue working the customer and adapt and do what it takes to differentiate and become a market leader.

Okay. Just one more from me, and thanks for your time. What would PayPal need to do to make you nervous?

That's a good question. Charlie, do you have an answer for that one? No? Are you on mute, Charlie? I mean, I think -- sorry, I think once I see more adoption in the market, I think we'll have to pay closer attention to them. But look, we've been -- like I said earlier, we've been competing against very large, strong competitors since we've been around, and we've been able to continue to grow at the same pace. So I feel very confident in our ability to compete with PayPal. Charlie, do you have anything to add?

Yes. I think all I was going to add is that it really comes down to the numbers. And what we're seeing is continued growth, which I think is the impact we have for our merchant partners. And so I think that's what it really comes down to in the end, (inaudible) kind of results do you drive for your merchant partners and for your customers, and that's where we'll get worried. And we see that our customers are happier with someone else.

(Operator Instructions) We are showing no further questions at this time. I'll now hand back to Mr. Youakim for closing remarks.

Thank you. In closing, I'd just like to say how proud I am of our team at Sezzle, how well we tackled 2020. First 2 months of 2020 were filled with unprecedented challenges in and out of the workplace. Company's coming out of COVID thriving, which is largely due to the incredible work by our team. I'd also like to send a big thank you to our team at Sezzle, if they're listening. We wouldn't be here without you and with all your great work. Also a big thank you to our investors. We'll continue to work hard to create a good return on your investment. Thank you all, and have a great day.

That does conclude our conference for today. Thank you for participating. You may now disconnect.