Qliro AB (publ) (QLIRO) Earnings Call Transcript & Summary

Welcome to Qliro Q1 Report 2023. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Christoffer Rutgersson; and CFO, Robert Stambro. Please go ahead.

Welcome to the presentation of Qliro's report for the first quarter of 2023. I'm Christoffer Rutgersson, CEO of Qliro. And with me today, I also have our Chief Financial Officer, Robert Stambro. In terms of our key business highlights, the first quarter is our first profitable quarter since listed on the stock exchange given the positive traction in our profitability program. Our profitability measures took effect in the quarter, and hence we reached profitability. Given that this occurred earlier than expected, we announced a trading update also in early April. Today, I can confirm the preliminary results that we presented in April. Revenues were up 7% to SEK 113.7 million in a declining e-commerce market. And as I said, the profitability measures taken during 2022 contributed with improved operational excellence, visualized in reduced cost of 12% or around SEK 11 million to SEK 80.1 million, excluding items affecting comparability. Top line growth, combined with a decrease in cost as part of the profitability program, led to a result that increased reaching total SEK 14.6 million year-over-year, excluding items affecting comparability. Secondly, we have continued to deliver on our increased focus on payments, which in we have made good progress in the quarter. Our total payments volume declined just 2% year-over-year with an e-commerce dropping with roughly 6% in the Swedish market. At the end of the quarter, we had 61 active merchants, a growth with 3 new merchants since the year-end. We have also signed agreement with 3 new enterprise merchants planned for onboarding in the second quarter. As a step in capitalizing on our direct payment volumes, i.e., what we call Pay Now volumes, we have developed a Collecting PSP service, which we will launch in the second quarter. This is an important step in our ambition to become a better payment partner to merchants and better capitalize on the volumes that we are processing. As we wrote in the report, we have also decided to introduce new KPIs to better reflect our business. I will come back to that during the presentation. I hand over to Robert.

Let's look at the financials and focus on the Q1 figures. Last year in Q2, Qliro's Board of Directors announced the ambition to be profitable for the full year of 2023. Shortly after the announcement, we launched a profitability program to reach that ambition. The program ran until the year-end 2022 with corresponding investment costs and items affecting comparability. When we now look at Q1, it's fair to say that the profitability program has been successful. We are now profitable for the first time since being listed on the exchange in 2020. Income grew with 7% in the quarter, driven by Payment Solutions that grew by 10%. Cost efficiencies within the profitability program bear fruit in the quarter, moving the operating costs excluding IACs down to SEK 80.1 million. That is a change of SEK 11.4 million since Q1 2022 1 year ago, deducting for the SEK 4.9 million IAC for Norwegian VAT that we had in the comparison period. And it is SEK 18 million lower than last quarter, Q4 '22, a quarter that always is a bit more cost intensive than others. Credit losses was SEK 32.5 million in the quarter, lower than Q4 but higher than Q1 last year. The credit loss increase in Payment Solutions versus Q1 last year was driven primarily by the loan balance growth, but also higher preferences among our customers towards BNPL products instead of invoices which, in its turn, requires more reservations. The credit loss increase in Digital Banking is primarily driven by changed customer composition in the portfolio which, in its turn, drive more reservation but also higher income margin. So to sum it up, we are profitable in the quarter for the first time since being listed. We have delivered on the profitability program. And we stand firm with being profitable -- with the ambition of being profitable for the full year 2023, but there may be variations in quarters during 2023. Cost reduction is an important driver for the positive result in this quarter. The profitability program has not only decreased our cost base, but also enhanced our capabilities. We have digitalized post and print and launched a digital inbox. We have reduced the workspace by 50%. We have modernized and swapped out old technology, which have reduced the recurring depreciation. We have walked through all agreements at Qliro and pushed down costs in many areas. In connection to this, we have implemented a more granular cost ownership and cost control at Qliro. We have delivered on operational efficiencies and have, among many things, implemented a new CRM system to optimize sales and the merchant onboarding process, implemented a new customer service system to be more efficient in servicing customers and our merchants, and changed accounting system. We have accelerated sales and launched SME. Today, we have 3x more personnel working in sales than 1 year ago. We have improved internal processes to reach and onboard merchants faster, and we have launched a new merchant web. So all in all, we have delivered on the profitability program, and we have taken the first step on our way to deliver on the ambition to reach profitability for the full year 2023.

Thank you, Robert. As you know, we have decided to display new KPIs for our Payment Solutions business. And to give color to this, I would like to describe some of the dynamics in the business model. In our offering to merchants, we enable their consumers to both Pay Now and the opportunity to Pay later in the Qliro Checkout solution, which is available for the merchants, both on the web and in apps. Pay Now payment methods are, for example, card payments, PayPal, mobile payment wallets like Swish, Vipps and MobilePay and online bank payments through Trustly or iDEAL. All of this we call Pay Now, currently standing for roughly half of our total payment volumes. However, in the past, we have not really capitalized on these volumes and hence not presented the volumes or KPIs related to this part of the business externally. The other half of the payment volumes come from Pay Later, which is our invoice product or BNPL product. Previously, we called this pay-after-delivery, but as some of our merchants are selling services without physical delivery, we will instead call it Pay Later going forward. Looking at the total payments volume, including both Pay Now and Pay Later volumes, we have during the last 12 months processed roughly SEK 12 billion, almost double the volumes we have previously communicated as we then only focused on our Pay Later volumes. And I think it's important to visualize the full volumes that were going through the Qliro platform. Connecting to Pay Now, we have several strategic initiatives which will impact our payment business going forward. We are expanding into SMEs, where we can charge more for Pay Now payment methods. We are launching a Collecting PSP service in order to fully package both Pay Now payment methods and our Pay Later products for the merchant. So we can manage, for example, all contracts, pricing towards the merchants, reporting, reconciliation of the payouts and also manage kind of the actual transfer of payouts for the merchants. We are expanding also our capabilities geographically through merchants in markets outside the Nordics, where Pay Now is even more important than Pay Later. We are also actively optimizing our conversion for merchants, and then the conversion is basically how many transactions do you get to in your online store through our checkouts. And as part of that, Pay Now methods have a significant impact on overall checkouts performance and quite large variance between different payment methods, which we can optimize for the merchants. These strategic initiatives are key aspects in our intention to increase capitalization on our volumes, especially from Pay Now, that have also been steadily increasing during the past year as we launched several new Pay Now payment methods. To better reflect both the strategy and its implications on our business, we have therefore decided to introduce new performance indicators: total payments volume, which is all volumes processed via the Qliro Checkout; our Pay Now volume, which is then all direct payments through the checkouts; Pay Later volume, previously called pay-after-delivery, which is basically both our invoice product as well as Buy Now, Pay Later volume, including all our different part payment products. And to illustrate income generation from our payments business, we have also decided to introduce what we call a take rate, which is operating income divided by total payments volumes in order to also easily compare us to other payments businesses internationally. And last but not least, we're also introducing average order value also within Pay Now and Pay Later, where we typically see more than 40% higher average order value on Pay Later products, indicating the importance of these payment methods for our merchants. Through these new measures, we illustrate the development in all aspects of our payments business going forward, and it will be important as we continue to grow the payments business. I hand the word back to Robert.

Thanks, Christoffer. Payment Solutions stands for 84% of our income generation and it continues to show good progress in the quarter. New sales resources are starting to come up to speed with new processes, systems and tools at hand. The number of active merchants grew with 17% year-over-year, and we grew our merchant base with 3 additional merchants in the quarter. Qliro shows yet again good resilience in a declining e-commerce market. Total payment volume decreased with 2% compared to the market in general that decreased with 6%. We have seen a clear shift in the customer preferences towards BNPL volume that grew 8% in favor of invoices that decreased with 17% year-over-year. This had a positive impact on our income generation. The number of consumers that use Qliro's payment platform continue to grow. 5.6 million customer -- consumers have used our checkout the last 12 months, a growth of 4% or 200,000 new unique customers since 1 year ago. The take rate, which is the operating income divided by the total payment volume from both Pay Now and Pay Later, grew with -- from 3.1% to 3.5%. In other words, we are yielding better on every volume krona processed on our Payment Solutions platform than 1 year ago. The shift in customer preferences, favoring BNPL products, affected payment balances positively with 4% which, in its turn, affected income and credit loss development. As mentioned, Qliro performed well in a declining e-commerce market and gained market shares. Income growth with 10% in the quarter, driven by the increased interest in our BNPL products that grew by 8% versus last year. As you know, we launched a new strategy in 2022 with clear focus on merchants, widening focus on sales including SMEs and the introduction of Collecting PSP as an enabler. Collecting PSP for card payments is now technically ready. More Pay Now payment methods will be included during 2023. This will simplify onboarding of new merchants, improve our merchants experience as well as enable Qliro to capitalize on Pay Now volumes. Because of the strategy shift, Pay Now will play an increasingly important part not only for merchants but also Qliro going forward. The introduction of Swish, Vipps and MobilePay have had a strong impact on the Pay Now volumes but also affected the product composition in Pay Later. That is the reason for us to include additional key ratios surrounding Pay Now and also further explain the dynamics in Pay Later in our financial presentations and quarterly report already now. The Pay Now part of our business stands for 52% of all volume processed but is at the moment a smaller part of the income generation in the payment segment. These have historical reasons where focus was put on Pay Later. We also see a clear trend in customers being more interested in BNPL products. This had a positive effect on the income development. Credit losses decreased versus last quarter and increased versus Q1 2022. The increase versus last year's same period is driven mainly by loan balance growth but also, as just mentioned, the higher preferences among our customers towards BNPL products that drives more reservation than invoices. So to sum it up, income in Payment Solutions grew with 10% driven by BNPL products. Pay Now will grow in importance over time as part of our strategic focus.

Thank you, Robert. Since last year, we launched our new payment strategy. Clearly, we have been on a transformative journey to build a stronger payments business. And to give you some flavor of our strategic direction, I wanted to present a couple of areas. So first of all, we are working hard on increasing our addressable market in the payments landscape, where Qliro historically have been an enterprise business, building custom solution for enterprise e-commerce merchants, which means we have a lot of technical capabilities and flexible solution. And we are now packaging this for small- and medium-sized businesses that want to have a solution they can grow it. And this is not only good for the merchants. It's also good for us that it opens up a new market which we have previously not addressed. Secondly, we want to build a great payments company where historically, we've been very focused on our own Pay Later payment methods, invoice and BNPL, different part payment products, where from a merchant perspective, they're still buying a checkout from us including all relevant payment methods as presented previously, including different Pay Now payment methods. And with the launch of Collecting PSP service, we can now package and capitalize also on the Pay Now payment methods, which simplifies for the merchants to use our services. Third, we want to expand with our merchants, and I think this has been part of the historic growth journey of Qliro where we have supported our merchants primarily in the Nordics. But we have also expanded with a few of our merchants to support them kind of across all their markets, especially for merchants that went live over the last 2 years. And we are now in a better way packaging this with the new merchants, some of the ones we signed in Q1 and some of the ones going live this week, we're giving them our kind of full global capabilities enabling all their markets. And so far, we are using 8 different languages in our checkout. It's also quite easy to add additional languages supporting merchants as they go into selling in new countries. Fourth, we are -- we want to help merchants grow their revenue, not only follow them on their growth journey in terms of market but also work closely with our merchants. And this is -- I think it's been a core of the historic success in the enterprise segment that have been a very good partner developing our product together with merchants. And during the last year, we have invested in our data and analytics capabilities moving over fully to Snowflake and investing in optimizing conversion. So right now, we are actively working with several merchants to optimize conversion, and conversion is basically how much transaction the merchants are getting through, so a higher conversion is a higher revenue for the merchant; and secondly, to also drive revenue through upsell functionalities where we can help the merchants sell more after a consumer has completed the checkout. And we're also working actively on, say, how can we help consumers coming back to the same merchant and create loyal consumers coming back and buying kind of again and again? And I think this has been a historic success of many of our existing merchants, which have a very good consumer experience, like Lyko and Inet and CAIA and others. And we see this as a true differentiator versus other players in the market. And fifth, last, we are also working on how we could scale up Qliro where, historically, given that we've been founded and kind of developed as an internal company with an e-commerce group in the past, we've been very strong on the product side of the business, developing an experience externally for our merchants and consumers. However, in the past, I think we spent less effort on internal scalability, processes, tools and systems. So that's also an area where part of the profitability program we have invested in building this up in order to be able to scale up Qliro going forward. So I hand over the word back to Robert to walk through our Digital Banking business.

Thank you, Christoffer. Let's look at Digital Banking segment that stands for 16% of the income generation. The loan balance continued to shrink in size and have lost 16% since last year. It now stands for 34% of Qliro's total loan balance, and compared to 1 year ago, then it was 39%. The reason for the reduction in loan balance size is because of the paused e-mail marketing in Q3 2021. Worth to notice is that the reduction in loan balance size is getting smaller by every quarter. The reduction was SEK 24 million since Q4 last year, more than half of the change than between Q1 and Q2 2022. Although the loan balance have reduced with a total of SEK 159 million since Q1 last year, it has not affected the operating income to much extent. The income margin, which measures the income of the funding cost over loan balance as during the same time period, increased from 7.5% to 8.5%, a change of 100 basis points. This has mitigated most of the loan balance reduction. Operating income was SEK 18.5 million in this quarter. It was about SEK 800,000 lower than Q1 last year. The reason for the increased operating margin is due to the gradual movement in the customer mix throughout the year. We tend to attract less low-risk customers into the personal loans portfolio than previously. And this mix effect has caused operating income margin to improve, as mentioned, and consequently, worsened the credit loss level. So to sum it up, the balance is decreasing in size quarter-over-quarter and year-over-year as a result of paused marketing. The reduction of the loan balance has gotten smaller by every quarter and it's starting to flatten out. The mix effect in the portfolio caused operating income margin to improve and to worsen the credit loss level. Let's look briefly at the capital and liquidity position. Qliro has a capital headroom of 7.3% or SEK 166 million to regulatory requirements. The liquidity position is strong, which is proven by an LCR of 467% and net stable funding ratio of 131%. The funding activities are focused on the Nordic countries and is -- the lending activities are focused on the Nordic countries, as you know, and is funded mainly by deposits in Sweden and in Germany. Lending to the public in Norway and Denmark are financed by the swap market. And with that, I hand over the word to Christoffer again.

Thank you, Robert. So looking ahead, we are continuing to focus on becoming a stronger payment partner for merchants to further expand in both the enterprise and the small and medium-sized segment of Payment Solutions. We have also launched a new merchant success team, providing ability to increase our speed of onboarding new merchants during the year. And we are launching our Collecting PSP offering in the second quarter with card payments to improve capitalization on Pay Now volumes. And we will introduce more payment methods kind of later in the year. The profitability ambition for the full year 2023 remain intact, but the earnings before tax may vary over the coming quarters. So thank you very much, and we open up for questions.

[Operator Instructions] The next question comes from Ermin Keric from Carnegie.

So first of all, thanks for the new KPIs. It's definitely very helpful. Maybe starting on the take rate. Given that you're talking about Pay Now becoming a more significant part of your business going forward, should we expect that one to slide somewhat while volumes are maybe increasing more to still offsetting on an overall income basis? But just the take rate isolated, how should we think about it?

The take rate is calculated as our total operating income in the Payment Solutions business divided by our total payments volume. So it's already including the Pay Now volumes in the metrics. So as we expand in both SME segment where margin is typically slightly higher than in the enterprise segment as well as kind of capitalizing more on the pay volumes, I would expect the take rate to slightly increase going forward. In general, it's true that if you look at it separately, the take rate on Pay Now is much lower than kind of the take rate on Pay Later product.