Sezzle Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good evening, and welcome to the Sezzle First Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Charles Youakim. Please go ahead.

Charles Youakim : Thank you. Good afternoon, everyone, and welcome to Sezzle’s 2024 First Quarter Earnings Call. My name is Charlie Youakim, I’m the CEO and Executive Chairman of Sezzle. I’m joined today by my Co-Founder and President, Paul Paradis, our Chief Financial Officer, Karen Hartje; and our Head of Corp Dev and IR, Lee Brading. In conjunction with this conference call, we filed our earnings announcement with the SEC and have posted along with our earnings presentation on our investor website on If you have not done so already, please go to the Investor Relations section of our website. There, you’ll find the press release and earnings presentation under quarterly earnings within the financial section. Now that we’re all sorted, let’s get started.

We’ve had a number of extraordinary quarters in our short history, and I think you’ll agree that this quarter could be among the best thus far. Now let’s dive into the presentation starting with the left side of Slide 3. Q1 turned out to be another strong quarter of top line growth as total income increased 35.5% compared to the prior year’s quarter. Net income for the quarter came in at $8 million, which is larger than the $7.1 million in net income that we posted for all of 2023. Because that result puts us at nearly 50% of our guidance for the year, you might guess that we’re raising 2024 guidance, and you’re correct. I’ll get to that in a moment. The $8 million in net income represented a 17% net income margin and resulted in a 31% return on equity for the quarter.

To emphasize the return on equity is for the quarter. It is not annualized. Our total subscriber count increased to 371,000 at the end of the quarter, which represents a net increase of 64,000 subscribers during the quarter. Further, we recorded $15 million in adjusted EBITDA compared to $8.3 million in the prior year, at a margin of 31.9% for Q1. Consumer engagement remains high as evidenced by the top 10% of consumers transacting an average of 53x per year. As alluded to earlier, we are raising our net income guidance for the first time providing EPS guidance. We are increasing our GAAP net income guidance for 2024 to $30 million from $20 million and providing GAAP EPS guidance of $5 for 2024. On previous calls, we have discussed the Rule of 40 and how companies may differently define profit margin and a range from adjusted EBITDA margin to net income margin.

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We’re happy to say that we exceeded the Rule of 40, however you’d like to slice it. If you take the hardest measure of the Rule of 40 and use revenue growth and net income margin were north of 50% for the quarter. If you take revenue and EBITDA margin, we’re north of 67%. We also discussed our own goal of 20-60-20, which equates to beating a 20% revenue growth target, a 60% gross margin goal and a 20% net income margin goal. In the first quarter, we’re getting closer to attaining that overall 20-60-20 goal with a 35.5% revenue growth, a 55% gross margin and a 17% net income margin. Because of our recent run of successes, we often get the questions from bankers, analysts and investors. How have you all done such an amazing turnaround? What’s the secret sauce?

Our success did not happen overnight nor was it easy, but it occurred through creativity, dedication and hard work from each employee at Sezzle. But at our core, every decision we make, we consider our guiding principles as laid out on Slide 4. Starting with positively affecting profitability. We used to chase growth for growth’s sake. We no longer do that, which is obvious from our results. A key part of profitability is increasing the lifetime value of our consumer. The launch of our Premium and Anywhere subscription products is a great example of us focusing on increasing LTV, while we create products that our consumers truly love. While it may not reflect it in our absolute numbers, we are highly focused on acquiring new users. But first, we had to focus on profitability.

Over the next 6 to 18 months, we have several items focused on driving user acquisition from marketing campaigns to product offerings. Last but not least, from a stakeholder perspective, driving profit and bottom line results are important, but we also recognize that we must be good stewards. We are proud to be the only buy now, pay later company that has a certified B Corp, which is spouses being good stewards for the next generation that comes after us. We expect to renew our B Corp status this summer. As mentioned earlier, we have surpassed 371,000 subscribers across Premium and Anywhere. As shown on Slide 5, the amount of engagement and positive feedback has been extraordinary. Consumers have really embraced the flexibility of Anywhere with about 32% of the orders being generated from virtual card taps at point-of-sale retailers.

These are in-store transactions. Subscribers are also on average, making 6 more purchases a quarter than nonsubscribers, which is a key part of us increasing consumer lifetime value. Further, our new members are shopping at a broader array of locations and are making everyday purchases at general merchandise retailers, grocery stores and restaurants to meet their discretionary needs. To borrow a quote from a recent article in PYMNTS, the data seems to suggest that buy now, pay later is simply a modern adaptation of credit in the evolving landscape of consumer finance. Again, going back to our mission. Through these subscription services, we continue to financially empower the next generation on their journey through life and our NPS scores continue to track well for Anywhere and Premium.

We do see customer NPS outperformance in Anywhere relative to Premium, and we attribute this simply to the greater flexibility of Anywhere as a consumer product. We are excited about the path forward and aren’t resting on our laurels. As shown on Slide 6, we recently launched Payment Streaks for consumers. We essentially Gamified payments for consumers by rewarding good behavior, which marries well with our commitment to enhance the consumer experience and foster financial responsibility. It’s too early to provide any color on the progress as we have just launched the product in the last couple of weeks, but we will surely be watching closely at the impact of Streaks. We think that the new tiering system and the gamification and Streaks will enhance the consumer experience and help us with consumer retention as we’ll start to have natural segmentation occur within our consumer base through the tiers attained via their payment performance.

We are also making great progress with our marketplace expansion into direct product listings. While it is still a work in progress, we are seeing it drive more engagement per square inch of mobile real estate through clicks and app sessions, which ultimately lead to better financial results and better retention of consumers. Similar to Payment Streaks, many of the improvements are very recent, so it’s too early to share any quantifiable results. Our bank partnership continues to progress, and we believe we’re going to have a very good relationship with our future partner. We are fully engaged across the company on completing the final steps in our prelaunch engagement. The key initial benefit of the bank partnership will be the banking as a service relationship, which will allow us to unify our product construct behind a national standardization versus the state-by-state operations we work through today.

The state-by-state approach has proven to limit our profitability due to some states very restrictive lending loss. As an example, some states don’t allow any late payment fees and others restrict the amounts and timing of the fees. These numerous and diverse laws have made running our business a bit more complicated while also limiting our products profitability. Through the bank partnership, we’ll have a national banking charter behind our product that will help us pull back the restrictions, increasing the profitability of our core products. The secondary benefit of the banking partnership is that it will allow us to launch additional products that we believe will be a key to future user acquisition and customer lifetime value expansion.

The future benefits of this banking partnership are not included in our updated guidance, and we’re not able to share the details of expected impact as we follow a conservative approach with projects like this. We like to actualize the benefits before we pass the results into internal budgets and guidance. We’re also not guiding on the timing of this going live as half of the work is not in our hands. Slide 7 provides a sample of some of our marketing efforts. In case you’re new to Sezzle in the early stages, our marketing efforts were completely targeted towards the merchant. And while the majority of our spending is still targeted toward merchants, we are expanding our efforts to the consumer as showed on Slide 7. Our marketing team is to create a bunch, and I’m looking forward to what they come up with next.

By the way, all of these efforts are evaluated based on CAC to LTV ratios. Our positive results and momentum are further reflected in some of the key nonfinancial metrics as shown on Slide 8. It has been great to see us growing subscribers, increasing repeat usage and improving consumer purchase activity in terms of frequency and total order count. As further evidence of the success of Sezzle Anywhere, which was launched in June of 2023, shoppers have been using it everywhere. In the first quarter, shoppers use us at over 149,000 merchants compared to just 22,000 in the prior year. It is great to see Sezzle become a part of people’s daily lives. Year-over-year, we experienced a decline in active consumers, but sequentially, the number has been flat since August.

As noted last quarter, we believe it has bottomed out, and we look forward to seeing active consumer count pick up in the second half of this year. With that, I’m happy to turn the call over to our CFO, Karen Hartje, who will go over the quarterly financial results in greater detail. Karen?

Karen Hartje : Thank you, Charlie, and hello to all. On to Slide 9. As referenced several times already, we had a very good start to 2024 as reflected in our year-over-year results. Total income increased 35.5% year-over-year, led by a 33% increase in UMS. Net income came in at $8 million for the quarter compared to $1.7 million the previous year. The improvement was driven by a combination of driving top line growth through UMS growth and subscription sign-ups while also lowering operating expenses. Those actions are further reflected in our EBITDA margin of 31.9% and our non-transaction-related costs declining to 34.5% of total income compared to 55.7% in the prior year. As shown on Slide 10, we typically see a drop-off in UMS from fourth quarter to first quarter due to seasonality.

The seasonal drop-off in UMS was consistent with what we have experienced in the last couple of years. However, I would like to note that we did not see that same drop-off in total income, which only fell 3.9% from fourth quarter to first quarter as we had a pickup in subscriptions during the quarter. The combination of UMS and subscription growth drove total income higher year-over-year by 35.5%. On Slide 11, transaction expense, which is primarily payment processing costs, rose to 2.4% of UMS. Although we did see an increase partially attributable to our average order value declining during the quarter compared to the prior year, we believe we can lower this back to recent historical levels as a percentage of UMS. Seasonally, first quarter is a healthier quarter for a provision because of the tax refund season.

We do expect the provision for credit losses as a percentage of UMS to rise over the remainder of the year as it did in 2023. However, we expect it to remain within a reasonable level as we continue to evaluate the balance of growth versus losses. Led by the increase in provision year-over-year, our transaction-related costs, as shown on Slide 12, rose to 44.7% of total income. Nonetheless, as reflected on Slide 13, we were well above our 2024 guidance of total income less transaction-related costs of 50%. In case you haven’t figured it out by now, we are not all about growth at any cost. On Slide 14, you can also see that we are hyper focused on expenses. Not only were we able to grow the top line by over 30%, but we were able to lower non-transaction-related operating costs on an absolute basis by $3.1 million, representing over a 15% decline year-over-year.

The line graph on the right side of Slide 14 reflects how the combination of our unit economics and expense management are driving strong bottom line performance. Speaking of bottom line performance, turn to Slide 15. The evidence is in the results, $8 million of net income and $15 million of adjusted EBITDA. In 2024, we have also improved our liquidity position and solidified our capacity for further growth as evidenced by our new credit facility highlighted on Slide 16. Subsequent to quarter end, we closed on a new $150 million facility with Bastion, a longtime lending partner for Sezzle. The new facility increases the size of our credit facility and significantly lowers the interest rate cost from SOFR plus 11.5% just over plus 6.75%. We expect to significantly reduce interest costs going forward as the facility has a lower borrowing rate and a lower minimum utilization requirement.

All paths lead us to continuing to improve and strengthen our balance sheet. Slide 17 reflects the positive impact our bottom line performance has had as stockholders’ equity stands at $29.6 million, and we have built an unrestricted cash position of almost $78 million compared to only $59 million at this time last year. At this point, I imagine everyone is treated and looked ahead to our outlook on Slide 18. I know I would have by now. We are happy to update previous guidance and provide some additional guidance as well. We now anticipate our total income growth rate for 2024 will be approximately 25%, resulting in total income of $200 million compared with our previous guidance of 20%. We still expect total income less transaction-related costs to come in around 50% for 2024.

Meanwhile, we are upping our GAAP net income guidance to $30 million from $20 million. We expect our new GAAP net income guidance to result in GAAP EPS of approximately $5. At the bottom of Slide 18, we’ve added a valuation metric based on the ratio of our market cap to our 2024 earnings guidance and compared it to the same metric using the consensus for other popular indices. I’m sure you get the point without us stating it. We are not happy with our valuation as we are trading at less than half of the valuation when compared to these indices. As we were hyper focused on being profitable, we are hyper-focused on enhancing shareholder value. In addition to the $5 million stock repurchase plan we announced in December 2023, we will evaluate other capital return options for shareholders, including, but not limited to, dividends, incremental share repurchases or a combination of both.

With that, I would like to turn the call over to the operator as we are happy to take your questions. Operator, will you please open the lines for Q&A.

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