Sezzle Inc. (SEZL) Earnings Call Transcript & Summary

Good morning, everyone. For those of us joining from our home here in the United States, good evening. And welcome to the Sezzle Inc.'s 2020 Annual General Stockholder Meeting. My name is Charles Youakim, the CEO and Executive Chairman of Sezzle, and I will be chairing the meeting today. Before we begin, I wanted to make a few statements about what we're seeing unfolding for us in Minneapolis. Our hearts go out to George Floyd's family and friends and to all of those who have been hurt during the riots that have unfolded since. What we saw from those 4 officers on Monday was a disgusting abuse of power and actions that are so far away from our core values that words can't do the situation justice. Those 4 officers disgraced their uniforms and damaged the reputations of so many honorable police officers. The riots that have happened since are also inexcusable and have led to a growing amount of fear and hatred. It's something that we need to work together to reverse. It feels like we're already past the worst here in Minnesota. The communities are now coming together to clean things up and get some semblance of normalcy back in place. I'm also happy to report that everyone in the company is safe. That's our #1 priority. We're a family, up for each other. Let's hope and pray that we can turn 2020 around and finish on a positive note. Let's return to the AGM proceedings. I confirm that we have a quorum for the meeting to proceed, and I am pleased to declare the meeting formally open. I'm delighted to also -- to be able to also extend a warm welcome to all of our stockholders and CDI holders who are participating through our online meeting platform. This meeting is being held virtually, meaning no physical meeting is taking place in person, but rather by remote electronic means as permitted by the company's bylaws. I'd also like to start acknowledging my fellow directors who are each joining the call from their usual locations. Also here in Minneapolis is Paul Paradis, my Cofounder, Director and Chief Revenue Officer. Joining the call, as well, are our 3 nonexecutive directors: Paul Purcell from Chicago; Kathleen Pierce-Gilmore from Maryland; and Paul Lahiff from Sydney, Australia. We are also joined by Mike Cutter from Melbourne, Australia, whose appointment is being proposed at today's meeting. In terms of our executive team, we also have a number of people, including our CFO, Karen Hartje, joining from our Twin Cities, St. Paul; our Australian Company Secretary, Justin Clyne, from Sydney, Australia; and our Head of IR, Lee Brading, who is joining us from Charlotte. Also online today is Rachel Polson, our audit partner from Baker Tilly in Minneapolis. The notice of meeting was distributed to all stockholders and CDI holders in accordance with the company's bylaws and the ASX listing rules and is also available on our website and the ASX announcements platform on the ASX website. I will take the notice of meeting as read. In terms of the process for the meeting, we will begin by meeting with a joint presentation -- we will begin the meeting with a joint presentation from Karen Hartje, Paul Paradis and myself, while the formal proceedings comprising voting on the resolutions occurs in the background. We will be withdrawing resolution 10 relating to the additional placement capacity as Sezzle's market capitalization exceeds the threshold permitted under ASX listing of rules. The resolutions will be decided by Paul. Voting on the resolution is now open via the online meeting platform. The voting icon will appear on the navigation bar. Once you click on this, the resolutions will appear on your screen. You can vote at any time during the meeting until I declare the voting closed. You can also change your vote at any time throughout the proceedings. I will give you a clear prompt later in the meeting to warn of the close in voting. I don't propose to read each of the resolutions as these are clearly laid out in the notice of meeting. The proxies received in respect to each resolution prior to the cutoff time are contained in the back of the presentation, which has been lodged with the ASX. We will also take the opportunity for questions, and you can start submitting questions now, including any questions for the company's auditor, and we will address them later in the proceedings. We will now move on to our presentation. As mentioned earlier, you can find our presentation posted on the ASX website if you'd like to follow along. Please open your presentation and proceed to Slide 3 where we'll cover the agenda. In today's presentation, we will cover the following topics: first, we'll reiterate our mission and talk about our plans to reinforce it. Next, we'll recap what was accomplished in 2019. Third, we'll talk about our positioning as the most consumer-friendly payment option and our emphasis on Gen Z. Fourth, we will discuss our push for top line growth, but how we push for growth with ever-increasing efficiency improvements in mind. Next, we'll discuss the importance of product innovation and how those plans help us. We'll also touch on how we've been handling COVID-19. And finally, we'll move on to the votes. Let's get started. Please use Slides 4 to 7 as your guide as we discuss our mission and how it's leading us on an important path, a path towards reinforcing the social good of our products. In case we have any newcomers, I wanted to repeat our mission: our mission at Sezzle is to financially empower the next generation. We embrace that mission in every decision that we make as a company. In order to reach our mission, we put in place some building blocks. Those building blocks are, first and foremost, security. We put a big focus on protecting our consumer data. Consumer data security is our #1 priority. Second, flexibility. We offer a good amount of it, especially with our consumers. A recent example of that was the flexibility we offered for hardship during COVID. But flexibility is also at the core of every product decision that we make. Third, transparency. We try to be as transparent as possible with all of our stakeholders as we feel it just makes everything easier. And the final building block is reliability. We're reliable in our relationships and our duties, and our product is also reliable. Our software has been operating with greater than 99.99% uptime since inception. These building blocks help us focus on our 2 key stakeholders, our consumers and our merchant partners, which helps us get to our mission. Slide 6 reveals our new brand image that we launched earlier this year, which is a much better representation of our belief system than our previous brand, trust, freedom and the future of what drives us forward, and we're excited that we're able to leverage our technology to do so. This all culminates into the announcement, which we're quite proud of. At this AGM, we are putting up to vote the amendments which will make Sezzle a public benefits corp, or PBC, which puts us squarely on a path towards becoming a certified B Corp. You may all be wondering, what does that mean for our shareholders? What it means is Sezzle stands for more than bottom line profit, which is something we've been saying all along. We follow a stakeholder approach to business, which is what you're saying when you become a public benefits corporation. We believe in doing more than just making money. We were always a public benefits corporation. We just didn't know it yet. Becoming a PBC and eventually becoming a B Corp. will reinforce our image and differentiate us as the most consumer-friendly company in our industry and also as a social good product for our consumers. We're extremely excited to move forward with these plans. On Slides 8, 9 and 10, we want to grow our business. We believe we make a compelling case for investment, and our results from the last year represent that case. We experienced tremendous growth in 2019, growing our revenues by nearly 10x from USD 1.63 million to USD 16.1 million, and we continue to experience phenomenal top line growth, both in UMS and revenue. We have an amazing opportunity in front of us with our strong positions in Canada and the USA. We made a great push in 2019 to get to unit economic profitability as we promised we would during our IPO process. We believe we have the most-loved consumer brand in the sector based on the reviews we received from our consumers and from our SME retailers. We work hard for both groups and the results show. The network effects of our business are taking hold now that we've grown so dramatically. We have over 1.3 million active consumers and over 14,900 active merchants. Those numbers are helping us attract more consumers and merchants to our platform. And we have also built every piece of technology in-house. Our IP and technology will continue to make our business more valuable each and every day. 2019 was the year that jump-started us, and the IPO was a big part of that ignition. During the IPO process, we issued over 35 million shares, raising over USD 27.5 million, net of costs incurred, which at that time was roughly AUD 41 million. We've used that money wisely and have been able to maintain a strong cash position. Our cash and cash equivalents balance sat at USD 38.9 million as of March 31 of this year, and we continue to use capital conservatively as we progress through 2020. We also closed a $100 million line of credit to support our UMS growth. As of the end of the first quarter, we had only utilized USD 25.7 million of the line. Each additional dollar on the line can support up to USD 14 of UMS. Our net external growth were also phenomenal during 2019, while still improving our margins and efficiency as a company. Our past year demonstrated that our product is here to stay. On Slide 10, we displayed some of the data gathered in a recent survey conducted with CGK, a group that specializes in millennial and Gen Z research. In that study, they found that 55% of Gen Z will try a new store if that store offered installment options. They also found that 50% of Gen Z either love installment options or find them helpful. Additionally, 71% of Gen Z respondents said they worry about their finances. That's where a budgeting tool like ours comes in so handy. On Slides 15 -- 11 through 15, we touch on our differentiators and unique elements behind the business. We strongly believe that our product is the most consumer-friendly product on the market. We are so consumer-focused that we believe it's the key formula for winning. We're so consumer friendly, that we've seen -- we're often seen as a social good here in the North American market. Our upcoming B Corp. goals reinforce that differentiation and our focus on Gen Z pairs nicely with that unique attitude. We know that Gen Z appreciates and is attracted to companies that behave with ESG attitude that we represent. Slide 12 shows why winning Gen Z is so important. That generation is the largest consumer population in the United States, representing over 84 million individuals. The Gen Z population in the USA is over 3x the size of the population of Australia by itself. Our consumer demographics, shown on Slide 13, show how well we're attracting Gen Z and millennials, but also display the opportunity that we have with Gen Z. Each year that passes brings a new group of young consumers from that segment that are attracted to our products. On Slide 14, we announce some of the many highlights of our business. These highlights include over 600,000 app downloads, over 6.2 million website visits in 2020 alone and our significant partnerships, which are helping us grow our business. On Slide 15, we wanted to show our investors that despite the rapid growth, we're not bending on many of the important elements to success. Our net loss rates continue to trend down and should continue to trend favorably as indicated by our leading loss indicators. We've also maintained strong merchant fees during our rapid growth, which points to the strength of our positioning and our -- with our merchant stakeholders. I'll now pass baton to Paul Paradis, one of my Cofounders and our Chief Revenue Officer, to go over what we've been focusing on in our business to growing.

Charlie, can you hear me?

Yes.

All right. Great. Hello, everybody. Well, it's certainly been a challenging last few months for the entire world really. Many of the changes that have resulted from the current global pandemic have really only increased the demand and usage of our solution for merchants and consumers both. E-commerce went from accounting for about 12% of total retail sales in the U.S. to about 25% in 1 month. And as a result of that, merchants are really moving more of their focus to optimizing their online channels, and Sezzle is a great tool to increase sales online. Historically, we've been a very SME-focused company, as many young tech companies need to be early in their journeys. But as we've proven out the value of our solution with thousands of smaller merchants, we're now having success acquiring larger and larger merchants. We've highlighted a few of those larger merchants here across our 2 markets of the U.S. and Canada. I'll touch on the ones shown here. Cabela's and Bass Pro Shops are 2 of the largest sporting goods retailers in North America. KEEN Footwear is a very popular footwear brand based in Portland. The Chivery and Bodega are very large apparel merchants. Touch of Modern is a large men's lifestyle retailer. Combined, these 6 merchants alone do about USD 1 billion in online sales and an additional USD 8 billion in store. So obviously, a big opportunity here. Shifting to Canada, SoftMoc is one of Canada's largest footwear retailers. Popeyes is the largest vitamin and supplements chain in Canada. G-SHOCK is a popular watch brand from Casio. Pela is a fast-growing phone case brand that's backed by Jay-Z. Knix is a very popular women's intimates brand based in Canada, and Livestock is arguably the most popular streetwear retailer in Canada. These 6 merchants do about CAD 200 million online and more than CAD 500 million in store. These are some of the larger merchants that are now under contract or are live with Sezzle, and we expect many more to come soon. Going to Slide 17, I'm going to touch a little bit more on Canada. This is our second market outside of the United States. You can move up the next slide. Thank you. And for some perspective here, Canada is about double the size of the Australian market. There's a ton of cross-border commerce between the U.S. and Canada. The time zones are the same. So it's an easy country for us to support. And culturally, our 2 countries are very similar. That's why we chose to expand here first. We do have an office in Toronto, led by Patrick Chan, who served as an enterprise sales leader for PayPal for many years and then Qualtrics, an SAP company. So far, we're seeing a very similar growth trajectory to our U.S. business at its early stages. And it's accounting for a larger and larger percentage of our revenue every month. So Patrick and team have done just a fantastic job out of the gate. You can move to Slide 18 now, please. We believe our solution is needed across many retail verticals. And I believe our diversification on the merchant side is really one of our strong differentiators relative to our competition; whereas most of our competition here in the U.S. or North America focuses almost exclusively on apparel and beauty, we've deliberately acquired a much broader merchant base, which broadens our user base in turn. While apparel is our largest vertical as well, leisure and hobbies, beauty and cosmetics and health and fitness are all categories that account for significant underlying merchant sales processed by our platform, and we're seeing growth across other categories like pets and home decor as well. As we move forward, we're going to continue to lean on this diverse merchant and user base as a competitive advantage. And I'll pass back to Charlie to talk about the evolution of our products.

Thanks, Paul. Product innovation is the heart -- is at the heart of our young company as we believe it should be at this stage. We're learning so much about the needs of our stakeholders that it would be reckless to believe that we finished solving their needs. On Slide 20, we touch on a few of the innovations that we've been -- we've made significant progress on. These are all in the late stages of product development or the early stages of product launch. First, I wanted to talk about our virtual card solution. Through this technology, we've extended our payment capabilities, which has opened up new doors. Our virtual card solution has been a tool that allows for live integrations with enterprise retailers, allowing those retailers to test and integrate our products without any heavy technical projects. The virtual card also allows us to process payments in-store with these same retailers. It does a lot as the products go to later stages. It's a product feature that allows our end users to build their credit scores. We know this feature is important to our young consumers. So it's been a focus of ours for quite some time. We'll be launching Sezzle Up sometime in the next quarter, expanding its reach once we get it out of pilot status. Sezzle Spend is a rewards tool that we're excited to launch in the second half of the year. One of our predecessors is the credit card. And as it is with credit cards, we feel like rewards are a natural addition to our product feature set. And finally, we have launched Sezzle Anywhere in the pilot stages. It's a product that allows our shoppers to utilize Sezzle's retail brands that support affiliate marketing programs and gift card issuance. These programs support fee rates similar to our merchant fee rates and expand the capabilities and reach of our products. It feels like a win-win for Sezzle and its end customers. On Slide 21, we come back to our stakeholder approach, which has been such an important tenet for our company. The stakeholder we're focused on in Slide 21 are our employees. We need to make sure that our employees are happy and in a good spot before we can expect them to deliver for our retailers, customers, community and investors. As you can see, we've always been quite good at maintaining high levels of employee satisfaction, but those satisfaction levels have risen recently despite all of the turmoil. I think it shows how well our team has come together during this time. On Slide 22, we wanted to cover our current regulatory endeavors. Interaction with regulators has taken a top priority within the company and has become a project that I'm now responsible for. We want to work closely with regulators to ensure compliance with their rules and regulations. We also want to educate them on our products and our industry, so that they can see the good that we're doing. We found this proactive approach as very productive. Many of the regulators we've spoken with are unfamiliar with our products. And we generally feel like they come away [ disarmed ]. You have to remember these regulators are effectively the police and focus on protecting consumers from bad actors. They are used to dealing with the bad actors. When we explained our products and our approach, we put discussions on the right path. We'll continue this product approach through 2020 and beyond. On Slides 22 to 27, we cover the final part of our presentation before we get on to vote. On Slide 24, we're covering how we're doing during COVID-19. We've already covered this topic a few times publicly. The good news, in a nutshell, things are going quite well. Our business fits squarely in e-com, so the demand is up significantly, and we find the unemployment support and stimulus package that we -- that have been created have helped our users. We acted swiftly in early March with our team, implementing a mandatory work-from-home policy to keep everyone safe and to support the approach of flattening the COVID curve. This has worked out quite effectively for our team as everyone on the team had laptops and our internal systems and VPNs were built with remote work in mind. We focus on overcommunicating with our team to make sure everyone can feel safe and secure. We've also increased our communication with our merchant partners while asking many of them to raise the bar to perform at a higher level. As businesses, our responsibility -- it's our responsibility to step up in times of these. That's how we were doing it; so, we expect our business partners to rise to the same level. For consumers, we've extended our hardship programs and increased the flexibility of our products. And by raising the bar on our retail partners, we've improved the overall quality of our service by our partnerships. Finally, for our community, we're doing our best to get back as a group. We promote a dollar-for-dollar charity match for all of our employees. We also had an employee-led donation drive, which gave to Second Harvest, a local food bank. And of course, our B Corp. efforts which we hope will encourage more businesses to follow a similar path. On the bottom right-hand corner of Slide 24, you can see that our hardship requests are dwindling, which also gives us positive feelings about our trajectory out of COVID. Slide 25 gives a new level -- gives a high-level overview of everything the U.S. government has done thus far to support citizens and businesses. The government has enacted monetary and fiscal policies in an effort to help us all get out of this period with reduced damage. And policies have been working. On Slide 26, we give a bit more detail on the CARES Act, which is the biggest and most impactful of those efforts. The CARES Act was a $2.3 trillion effort that provided for businesses and consumers. For businesses, the Paycheck Protection Program, or the PPP, was passed to help small employers keep their employees on staff. For individuals that did lose their job, the CARES Act provided $600 a week in additional unemployment assistance, which layered on top of state assistance programs that were already in place. Finally, the CARES Act included a stimulus package that gave every individual a cash payment of $1,200 to help spur the economy. I'll now pass it over to Karen Hartje, our CFO, who will go over our current financial position and our highlights thus far from 2020.

Thanks, Charlie. Can you hear me?

Yes.

Great. Okay. Moving to Slide 27. As of March 31, 2020, the company has $38.9 million in total cash, up $2.3 million from year-end. The increase in cash was driven by an additional $4.2 million of borrowings on the company's line of credit, bringing the total draw to $25.7 million on our $100 million facility as of quarter end. Every additional dollar of capital supports $14 of underlying merchant sales. Capacity on the current line of credit will fund more than $1 billion in incremental UMS. Our balance sheet is healthy, and we are well positioned for future growth. Going on to Slide 28. You've heard some brief misses throughout the presentation, but Slide 28 is our favorite. First quarter highlights reflect impressive growth compared with the same period last year and the prior quarter. First quarter UMS totaled $119.4 million and was up 321% from the same period last year. Also compared against first quarter 2019, active customers increased by 328% and repeat usage improved 190 basis points to 85.6%. As of quarter end, we had 12,715 active merchants, reflecting an increase of 27% from fourth quarter 2019. Merchant fees reflected the volume increase and rate improvement to 5.7% from 5.5% of UMS in the fourth quarter 2019. First quarter net transaction margin continues to trend positively. April of 2020 was a record month. April UMS totaled $57.9 million, and for that month alone, volume was higher than UMS from January through May last year. We added over 114,000 active customers and over 1,100 active merchants in April, both monthly records. We've been closely monitoring our leading loss indicators, and they remain steady to improving. Through April, the net transaction margin continues a positive trend. Today is the last day of May here in the U.S., and month-to-date UMS is reflecting higher daily volumes in April. May will be another record month. With that good news, I turn it back to Charlie.

That is good news. Thank you, Karen. That concludes our presentation. Thank you all for your support. We're working hard each and every day to provide all of our shareholders with significant returns, and we hope you see that.

We will now take questions from shareholders. And a reminder, you can submit a question by clicking on the question icon, which looks like 2 text boxes. If you're having any difficulties in asking a question, please refer to the user guide, which can be accessed through the platform. I will now begin responding to the questions that have been submitted, and we'll direct any questions to our auditor as relevant. [ Darren ] asks, "I believe Shopify recently announced a buy-now-pay-later effort. Do you view this as an opportunity or a threat, and why? I think -- [ Darren ], I think it's really a mix of both. I think the fact that Shopify has released a product like this shows that we're on the front end of what we believe is a megatrend in terms of installments. We've seen this take hold -- this idea of installments take hold in Latin America and South America, more recently in Australia, and now it's taking hold in the United States and Europe. And the fact that a major entity like Shopify is trying to dive into this shows what an opportunity we have before us. But of course, it represents another competitor. And it's something we're used to dealing with, which is also why we're so focused on the consumer and the consumer experience because it's not just about offering installments at this stage, it's beyond that. You have to create a strong connection with your consumer, so that when given a choice, the consumer will want to choose your brand first. And we've always believed that would be the case. We've always believed that it will be a multiplayer market. And the fact that we're moving so far ahead with so many new features on our products, we believe that will set us apart within this competitive environment. Any other questions? I'll wait for a couple of minutes just to make sure, that's the only one I see thus far. There are no other questions.

All right. Let's move on to the formalities of the meeting. The first item of business relates to the tabling of the company's financial report for the year ended December 31, 2019, and I note shareholders have been given the opportunity to ask questions concerning the financial statements of the company. A vote in respect of the financial statements and accounts is not required, and I will move to the resolution contained within the notice of the meeting. I appoint Stephen Jones of Computershare Investor Services as the returning officer. As mentioned at the start of the meeting, voting on the resolutions is currently open and you can vote at any time until I declare the voting is closed. Results will be released to the ASX after the conclusion of the meeting. Please note that only shareholders, CDI holders, proxyholders or authorized shareholder representatives may vote. Any directed proxies given to you by the shareholder will automatically be cast as directed when the poll is closed. If you have an issue trying to vote, the voting icon will appear on the navigation bar. Once you click on this, the resolutions will appear on your screen along with the voting options that are relevant to that particular resolution. Simply select one of these options and cast your vote. When the voting is closed, your final voting section will be reported. If you have any difficulties, please refer to the user guide, which can be accessed through the platform. I now move to the consideration of the resolutions. I advised at the beginning of the meeting that we will vote on the resolutions by way of a poll. Any undirected proxy votes given to the Chairman will be voted in favor of the relevant resolutions. Voting is already open and will remain open until I direct otherwise. The resolutions to be considered in order are: resolution 2, reelection of Charlie Youakim; resolution 3, reelection of Paul Victor Paradis; resolution 4, reelection of Kathleen Pierce-Gilmore; resolution 5, reelection of Paul Purcell; resolution 6, reelection of Paul Lahiff; resolution 7, approval of amendment to the 2019 equity incentive plan to increase the number of shares of common stock reserved for issuance thereunder; resolution 8, increase the number of directors from 5 to 7; resolution 9, election of Mike Cutter as a director; resolution 10, as mentioned earlier, this has been withdrawn; resolution 11, approval of amendment to bylaws and certificate of incorporation. The Board's recommendation in respect of each resolutions outlined in the notice of meeting and included within the presentation released to the ASX this morning are details of the proxies received in advance of the meeting for each resolution. I would like to advise that shortly the voting on all resolutions will close. Please take a few moments now -- we will now take a few more moments to allow you to finish voting. Please complete your voting now. Voting will automatically close in 1 minute. [Voting]

The voting has now closed. Please note that the final results will be advised to the ASX and also made available on Sezzle website along with all of our ASX announcements after the meeting. Thank you all for your attendance online today. As the business of the meeting is now completed, I declare the meeting closed, and thank everyone for their participation today. Have a great rest of your day. Goodbye.