Sezzle Inc. (SEZL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Sezzle Inc. Operational Update Conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Paradis, President. Please go ahead.

Thank you, and thanks to everyone for joining us on today's call. I'm Paul Paradis, President and Co-Founder of Sezzle. With me on the call today are Karen Hartje, our CFO; and Lee Brading, our Head of Investor Relations. I want to start the call by congratulating our CEO, Charlie, on the birth of his first child earlier this week. Charlie and his wife are still in the hospital, which is why Charlie is unable to be on the call today. But all reports of the mother and baby are doing well, so we're very excited for them and wish them well as they bring their baby boy home. This is a very strong quarter of growth for Sezzle, and we accomplished some great things that should continue to fuel our growth going forward. We want to walk everyone through the presentation at this point to make sure that we cover all the important topics. If you don't have the presentation, please download it from the ASX website, so you can follow along. Turning to the agenda. I'm going to share some notable accomplishments from the past quarter, walk through our key results, highlight some larger recent merchant wins, explain our partnership with Ally in a bit more detail, summarize what we believe to be our primary differentiators in the growing North American market and then provide a brief outlook for the remainder of the year. So moving to Slide 4. I'll start with some of the more noteworthy accomplishments from the past quarter. In July, we completed a successful capital raise, adding over AUD 86 million to accelerate growth and strengthen our balance sheet. A big thank you to our investors for continuing to support our business. A good portion of this capital is being used to expand our sales and marketing capabilities, including the build-out of an enterprise sales team. We hired Veronica Katz in early July to assume my former role as Chief Revenue Officer, leading all the growth areas of our business. Veronica came from PayPal, which she led large enterprise sales in North America and then strategic accounts globally for PayPal. Reid Bork joined us at the end of July also from PayPal to lead our enterprise sales teams -- sales team, excuse me, and we've added to his team in recent weeks. At the beginning of the third quarter, we assembled a team in India, the fifth largest economy and the second largest population in the world. Charlie has experience working in India with his prior payments company, Passport, so we were able to bring on some trusted employees to lead that business. Our near-term focus there is achieving product market fit, after which we hope this new market becomes material to our business so we can share more. We entered into a commercial partnership with Ally Financial, one of the largest banks in the United States. This partnership will enable us to offer longer-term installment loans for higher ticket purchases at point of sale, without us carrying any of the balance sheet risk. I'll go into a little bit more detail on that partnership later in the presentation. Our product and engineering teams were busy building product enhancements in the third quarter, furthering our launches of Sezzle Up, Sezzle Anywhere, Sezzle Spend and our in-store solution. And we had a record number of merchant additions, bringing over 4,700 new merchants onto our platform. We now have over 20,000 active merchants offering Sezzle, which is a milestone that we're very proud to achieve. Turning to Slide 5, I'll walk through some of the key measurables from this past quarter. We believe it's a very strong quarter overall. We generated USD 228 million in underlying merchant sales, which represents a growth rate of over 230% compared to Q3 last year. Merchant fees continue to gain strength, growing to 5.8% in the third quarter from 5.2% in Q3 last year. We attribute most of this to our [ seasoning ] merchant portfolio, which leads to a larger percentage of sales coming from merchant partners whose promotional rates have expired. We do, however, expect this metric to be impacted by the addition of larger enterprise merchants who require lower fee rates than SME merchants. UMS and NTM growth has been achieved alongside continued merchant and consumer growth. During the third quarter, active merchant count and active consumer count both grew by 178% year-over-year to over 20,000 active merchants and nearly 1.8 million active consumers. Turning to Slide 6, just a few more quantitative highlights to call out here. UMS at USD 82.2 million in September was a new monthly record for Sezzle as were the previous 2 months in the quarter. So very strong quarter throughout. Our repeat usage rate grew with over 89% of orders now coming from existing customers. This is the 21st consecutive month that this number has increased. We're extremely excited by this statistic because it represents the love our consumers continue to have with our platform and the added utility that it gains over time. Turning to Slide 7. As I mentioned previously, we added over 4,700 merchants to our platform in Q3, which is a new quarterly record. Most of the logos here were acquired over the past quarter, and I'll call out just a few of the more notable ones. Untuckit is a large, fast-growing apparel brand that decided to continue offering a competitor in favor of Sezzle, and they've reported great results so far. They just launched a couple of weeks ago, a few weeks ago. Altitude Sports is one of the largest sporting goods retailers in all of Canada, and we beat out a competitor after a head-to-head A/B test there. Untuckit and Altitude Sports, I think, are both great examples why we believe so strongly in our product and our ability as a company to win in competitive markets. One detail to add regarding the Canada market specifically, we just surpassed the 1,000-merchant mark there. A huge milestone for Patrick Chan and the team up there. They're doing a really phenomenal job, so kudos to them. Similar to Untuckit, Ministry of Supply is another large apparel brand in the U.S., who had been working with a competitor that decided to offer Sezzle instead of that competitor. Solo Stove is a large merchant powered by BigCommerce, which is important because this is our first direct integration with a BigCommerce customer. BigCommerce is an e-commerce platform that was actually founded by a couple of Australians that powers over 60,000 e-commerce stores globally with the majority of them being in the U.S. So this direct integration opens up a large new pool of merchants for us to partner with. The other merchants listed are all doing a lot of volume online or they're very influential brands within their retail sectors, which is why we chose to include them here. And finally, we'll be running a large marketing campaign this holiday season in concert with our merchant partners. It's generated a large amount of merchant interest, helping us acquire new merchants. And we expect the same on the consumer side once it goes live, resulting in increased UMS in Q4. On Slide 8, we discuss the Ally partnership in greater detail. Ally Financial is a large bank in the U.S. with over USD 180 billion in assets as of June this year. We wanted to bring a solution to market that enabled us to offer longer-term installment loans for higher ticket purchases without assuming any of the balance sheet risk. And that's what this partnership with Ally allows us to do. Through a single integration, merchants can turn on these longer-term installment loans financed by Ally and we'll dynamically present either our pay-in-4 option or longer-term installment options to the customer based primarily on card size. Longer-term installments are currently being offered by some of our competitors in the U.S., not all of them. And we believe it will make us much more competitive, especially with mass merchants who have a wide range of product values. Ally is a great fit as a partner. They're a digital-only bank, so they're much more tech-savvy than most banks. Additionally, they're focused on customer experience and "doing it right", align extremely well with our mission-driven approach to doing business. We expect the product to be in market in Q1 2021, and the initial term for the agreement is 5 years. Slide 9 summarizes what we believe to be our differentiators in the North American market. Our mission-driven approach and recent certification as a Public Benefit Corporation is really resonating with both merchants and consumers, and we believe positions us to be the BNPL of choice when consumers have multiple options at checkout. Our partnership with Ally will extend our reach into higher ticket point-of-sale financing, a large market that we previously could not service and that many of our competitors still are not in today. We embrace credit as an important part of a person's life and financial journey, and we see Sezzle as playing an important part of that journey. Through Sezzle Up, we're now able to help our consumers build their credit scores when they use Sezzle, something no other BNPL is doing in the U.S. today. We continue to expand internationally. We are the first pay-in-4 solution in Canada. We're the first in India, and we're continuing to explore other markets where we believe our product is needed. Even though we're shifting more of our focus to enterprise retail, we're still growing significantly within SME, with almost 70% of our merchant additions this past quarter coming from inbound SME sign-ups. From what we can gather, we have the largest merchant footprint in North America by count, and this is largely due to the virality we've seen with SME merchants in the U.S. And finally, we stand behind a merchant-funded model for our pay-in-4 product, not charging any interest and not charging fees if the customer pays on time. Some of our competition are moving to more consumer-funded models. But in our research, a merchant-funded model will actually provide more incremental profitability to a merchant because of the greater impact to top line sales that our model has relative to consumer-funded models. And then, finally, on Slide 10, we nearly attained our year-end annualized run rate goal of USD 1 billion, posting a run rate of USD 985 million in September. We're very confident we'll achieve this goal, given Q4 is the largest quarter for retail sales. And we do plan to provide updated 2021 guidance in conjunction with our annual report when that's released. And with that, we can open the floor to questions.

[Operator Instructions] Your first question comes from Phil Chippindale with Ord Minnett.

First question, just regarding the calendar '20 year on this target of $1 billion annualized. You're obviously within about 1% of that number for the month of September, but you haven't actually upgraded it. Can you just tell us sort of maybe the reason for that? Obviously, as you said, you're heading to a very strong seasonal quarter. So obviously we'd be expecting a strong result here. But you just retained it at $1 billion. So can you just talk to the reason for that?

Karen, do you want to comment on this one?

Sure. Thanks. That's a good question, Phil. Basically, we think that we will beat the target, but we don't -- aren't ready to talk about kind of any order of magnitude. And so again, you can see how close we are and that the fourth quarter is our biggest quarter. And so you can really draw your own conclusions from that. But we're not setting guidance for fourth quarter at this time.

Okay. Just turning to the Ally Lending partnership. Can you maybe talk us through what the revenue model is for Sezzle for that product? I assume you'll be putting the ticket on the TTV plus your net splits facilitated there. But maybe, just give us a sense of how Sezzle's going to monetize that product?

Yes. Yes, you're right, Phil. So we're essentially capturing more or less a processing fee just as we do today. But because our cost structure is quite different, we're not assuming any of the risk. Ally is doing the underwriting, they're doing the financing. So it will be a lower fee rate. But from a profitability standpoint, it will be quite positive. So it's essentially a per transaction fee, but it's a very different kind of unit profitability structure.

Okay. And then just in terms of how that new product is going to integrate with merchants. So say, for existing merchants, they'll have to opt-in with something they want to sort of integrate with. Is that how that's going to work? And then going forward, will it only be sort of enabled for those merchants who request it?

That's right. Yes. So it will be a single point of integration, so there will be no additional work for the merchants to view. But because it is a different product with different economics, and because Ally has to go through their own underwriting process, there will be an effort to: number one, understand which of our current merchants want to offer this and should offer this; and then who we should target together in partnership with Ally going forward. But the plan is, make it easy to integrate, make it a very seamless consumer experience so that they're given the right installment plan options depending on cart size. But there will be some additional effort to sell these products into our merchant base and then new merchants.

Can we just turn to the Target pilot program? I just want to understand what segments of Target that's going to relate to? And then secondly, can you give us a sense of how large that pilot program is going to be? So I'm not exactly sure how you want to talk about that, but maybe you could give us a sense of the duration of the program, or what percentage of customers are going to have it visible at checkout, that sort of thing?

Yes. I wish I could share more, Phil. At the request of Target, I'm not able to share any details of the pilot beyond what was published in our press release. But what I can say is that we have a very good relationship with Target. They're headquartered in our backyard. We participated in their retail accelerator last summer. They see the growth in buy now, pay later within the U.S. market. And we're really excited to show them the impact we can have on their business, helping them attract new customers and increase sales. I'm sure if you went to target.com, you could probably figure out which product categories were being offered on, but I can't provide any guidance around the volume, the term of the pilot, et cetera, at the request of Target.

[Operator Instructions] Your next question comes from Tim Piper with RBC Capital Markets.

Congrats on another good quarter. Just a follow-up on one of Phil's questions on the Ally Lending partnership. This obviously sounds like something you'll be able to drive greater merchant acceptance with. But given it's not starting until 1Q '21, have you actually started any conversations with your existing merchant partner networks around the product and get a sense of what the feedback has been and maybe what the uptake will look like on that?

Yes. The reason we brought this product to market to begin with is because we were tired of saying no, both to our existing customer or merchant base, I should say, and prospective merchants. So we know the demand is there. There are existing products in the market that resemble what this will be from companies like Affirm, Bread, others. So we know the demand is there. We have sized our current merchant base. I can't share what that forecast is. But know that we have already spoken with a lot of merchants about this, and there is a great deal of interest. Because there are a lot of merchants who only sell high ticket merchandise, whether it's furniture, high-end electronics, things of those -- products of that nature. So we're very confident that the demand will be there. And also mass merchants, you just have a very wide range of product values, right, who want to offer one solution that can cover all their different purchase types. So I can't share any specific guidance around what the impact, we believe, will be quantitatively right out the door. But just know that we have seen a lot of demand for merchants, and that's why we brought this product to market.

Okay. Great. And just second question around this trend you saw across the quarter. You've consistently grown UMS month-on-month through the year. September looked like a particularly good month, up 10%, 11% on August on a UMS basis. Can you just talk about the trends there? I mean you mentioned that it was a record month of new merchant additions. Was that the key driver in that particularly strong September? Or can you also talk about how you've invested in sales and marketing since the capital raise in July/August, and whether that sort of contributed to that uplift in September?

So I think you hit the nail on the head. I think the merchant growth is really what drove the majority of the record metrics that we saw. While we did start investing in sales and marketing post-fundraise, hiring people like Veronica Katz, Reid Bork and others, building up our marketing, partnership teams, et cetera, really, that's going to have a more lagging impact on our numbers, right. Because the sales cycle is a few months, and then you also have to onboard with the merchant, which can take time and get live. And then there's a ramp typically that you see in terms of how much volume you're doing at that merchant that takes time. So I think a lot of the growth that is going to be contributed by the staff upgrades that we've made are going to be in the future. They didn't occur in this quarter.

Okay. Got it. And you mentioned there with -- I think it was Altitude Sports in Canada. You ran a testing program against a competitor. What were the kind of metrics you were measured against on that competitor? And can you give us a sense of how you fared compared to that competitor? And happy to know which competitor it was, if you can say?

I don't think I'm supposed to say. And to be frank, the merchant was pretty guarded about the metrics and the data. Really, all they told us is that we outperformed them. Now we know every merchant, what every merchant is looking at is, how are you impacting basket size? How much share of checkout are you taking? How many new customers are you driving to us? How are you impacting return rates? All the incremental profitability metrics and customer lifetime value metrics. So I think it's safe to assume those are the metrics that we beat our competitor on. But again, at the request of the merchant, I don't want to divulge too much about the pilot in terms of who we competed against and what exactly the metrics were. But I think you could probably make a guess because this pilot occurred a few months ago, and there weren't too many competitors in this space at that time. So you can probably make a guess. I'll keep it there.

Okay. Got it. So just one quick follow on. There is some loose language in the release around sort of net transaction margin. Was it again better in the third quarter versus the second quarter?

Karen, would you like to answer that?

Yes. We're not releasing financial information yet. We'll be filing our 4C at the end of this month that will have our cash flow information.

Your next question comes from Phil Chippindale with Ord Minnett.

Just one more for me. I just want to circle back to the Indian pilot program. I'm just wondering if we can get a little bit more meat around the bone there. Certainly sounds like progress so far has been actually favorable. But as you indicated in the announcement, it's still early days. I'm just wondering maybe you could paint a bit of a time line for us as to when do you think you'd be in a position to maybe talk a little bit more about how that pilot program has gone? Is that sort of something we would expect maybe in 3 months' time? Or is that maybe a little bit too optimistic in terms of the timing?

Yes. I just can't say yet, Phil. We have a product in market there. The early results are very encouraging, but we're still in product market fit exploration mode, right? We want to ensure that the exact product is in market that consumers want before scaling significantly. So I wish I could provide more of a time line around when we'll be releasing numbers specific to India. But right now all I can say is the product is in market. It's scaling well. Early results are encouraging, and we really hope to be able to share more in the coming months and years. But I can't give a time line.

There are no further questions at this time. I'll now hand back to Mr. Paradis for closing remarks.

Well, thank you all for the time today. Really appreciate your support. We're really excited about the results that we achieved this quarter. If you have any follow-up questions, please don't hesitate to contact Lee. And I'm sure we'd be happy to answer an e-mail or hop on phone calls if needed. Thinking about our CEO, Charlie, really happy for him and his family, and we're going to continue pushing for all our shareholders out there and doing it the right way. So thanks for the time today and have a great rest of your day.

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