Sezzle Inc. (SEZL) Earnings Call Transcript & Summary

Hello, and welcome to the Annual General Meeting of Stockholders for Sezzle, Inc. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn the meeting over to Sezzle CEO and Executive Chairman, Charlie Youakim. The floor is yours.

Thank you. Good morning, everyone, or to those joining us from Sezzle's home in the United States, good evening, and welcome to the Sezzle, Inc. 2023 Annual General Stockholder Meeting, our fourth annual general meeting as a listed company on ASX. My name is Charlie Youakim. I'm the CEO and Executive Chairman of Sezzle, and I will be chairing the meeting today. I confirm that we have a quorum for the meeting to proceed, and I am pleased to declare the meeting formally open. I'm also delighted to be able to extend a warm welcome to all of our stockholders and CDI holders who are participating through our online meeting platform. As has been the case for each of our previous special stockholder and annual stockholder meetings, this meeting is also occurring by remote electronic means as is permitted by the company's bylaws. I would like to start by acknowledging my fellow directors who are each joining the call, commencing with Paul Paradis, my co-Founder, Executive Director and President; and our 3 independent nonexecutive directors, from the U.S., Paul Purcell and, from Australia, Mike Cutter. Paul Lahiff is an apology. We also have a number of people joining from our executive team, including our CFO, Karen Hartje, and our Australian Company Secretary, Justin Clyne from Sydney, Australia. Also online today is a representative of our auditors, Joe Donnelly from Baker Tilly in Minneapolis. The Notice of Meeting was distributed to all stockholders and CDI holders in accordance with the company's bylaws, U.S. regulatory requirements and the ASX listing rules and is also available from our website and the ASX announcements platform on the ASX website. I will take the notice of the meeting as read. In terms of the process for the meeting, we will begin the meeting with a presentation while voting on resolution occurs in the background. The resolutions will be decided by poll. Voting on the resolutions 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 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 closing of voting. I do not suppose to read each of the resolutions as these are clearly laid out in the Notice of Meeting. The proxies received in respect of each resolution prior to the cutoff time are contained at the back of the presentation which has been lodged with the ASX. The proxy numbers shown are based on the company's capital structure as of the record date of the 28th of April 2023, which is why the numbers appear in preconsolidation form. However, the proxies and results are not affected by this. 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 these later in the proceedings. We will now move to our presentation. You can find our presentation posted on the ASX website if you would like to follow along. Turning to Slide 5, you can see the agenda for today's presentation is broken into 4 segments. We will first discuss our mission and values, then we will cover our execution on becoming profitable, followed by a review of our financials with a market update. And lastly, we'll review the votes. Now let's get started. On Slide 7, we recently added the tagline to our mission of Financially Empowering the Next Generation, The Responsible Way to Pay. Assisting people on their financial journey is a great responsibility that we do not take lightly. We believe that we are filling an important gap for people at various stages of their journey. There's our core customer, which is a young adult. This customer just got their first job or still in school and they want to avoid interest. They want an opportunity to build credit and they fear getting caught in a debt spiral. With our payment methods, these needs are met. We are also finding that our product is expanding beyond our core customer. In addition to the needs of young adults, many in the U.S. are living paycheck to paycheck. For this group, the ability to spread installments out to match their budgets and gain some flexibility through our rescheduled feature are crucial elements in their daily lives when it comes to making payments. To sum it up, we believe that our methods of payments are the responsible way to pay. We also recognize that these customers need more than what we currently offer, so we aren't done, and we plan to continue to create ways that help the consumer on their financial journeys. Later in the presentation, we will discuss 2 additional product launches that are a step in that direction, Pay-in-2 and Pay Anywhere. Flipping to Slide 8, you will see that at our core, we are a B Corp with a commitment to driving change for all our stakeholders. The core pillars of justice, stewardship, advancement and integrity are values that we apply to our internal processes and external product offerings. Our status as a B Corp aligns with our mission to achieve growth, profitability and returns for our investors while continuing to do the right -- do right by our surrounding communities and our full set of stakeholders. Turning to Slide 9. There are a number of items to point out. First, as I alluded to earlier, we are finding that our product is being adopted by a wide audience. Think about it, 49 million U.S. adults are either credit invisible or unscorable. 25% of U.S. consumers have been rejected at least once when applying for a credit product and the ability to match budgets with payments is a top concern. What are their options? Again, we believe that we have the payment product suite for them, from Pay-in-Full to Pay-in-2 and Pay-in-4 and to long-term financing. Further, we are the only buy now, pay later company that offers consumers the ability to build credit in 4 payments over 6 weeks with our Sezzle Up product. Sezzle Up has shown the ability to increase credit scores positively by about 20 points within 4 months. We believe this is a very important differentiation for us versus other BNPL companies. How else can consumers create financial freedom without the opportunity to build credit? I can go on for hours on this topic, but we must move on. What does this mean for merchants? As shown on Slide 10, we had Forrester Research conduct a study, and they found an AOV lift of up to 57% when customers use Sezzle rather than other payment method and a payback period within 6 months for the merchant. In addition to attracting customers to merchants and providing a lift to AOV, we provide merchants with working capital loans through Sezzle Capital and other merchant-customized advertising and marketing to our nearly 3 million shoppers. We are just beginning to scratch the surface on advertising and marketing for merchants and think this can be a bottom line driver for us. We follow consumer reviews very closely. On Slide 11, we are pleased to point out our strong performance. We have launched a number of products since early 2022 and we see the early indications of success or failure in consumer reviews. As shown here, we are happy to report that we are excelling with consumers. On Slide 12, we show some of the accolades we have received in the last 12 months. We are proud of them all but especially proud of the Wall Street Journal calling us the best buy now, pay later app for building credit. As stated earlier, without the opportunity to build credit, a consumer's ability to grow and gain greater access to credit and financial freedom is limited. I'm proud to talk about the next section, Profitable Growth Through Strong Execution. Kudos to our management team and employees for making one of the greatest turnarounds I've seen. If you look at Slide 14, you can see the drivers of our turnaround. It was a mix of revenue and cost-savings initiatives. These initiatives were launched at various points in 2022 as shown on Slide 15. We began with about $10 million in announced initiatives in March of 2022 and created a snowball that kept getting bigger and bigger as it rolled downhill, resulting in over $70 million in annualized run rate revenue and cost savings as we exited the year. The result of all this hard work is apparent on Slide 16. We now have an attractive unit economics business model with a lean operating structure, more specifically, let's take a look at Q1. While we improved total income by 26% year-over-year to $34.7 million, we dramatically improved the unit economics to 5.8% of UMS compared to just 0.8% in the prior year. With steady methodical improvement throughout 2022, we saw our unit economics improve each quarter, resulting in about a 500-basis-point increase over the 12 months. I'm not aware of any other BNPL company that has made such a dramatic improvement. Our efforts would have been all for naught, if not for the corresponding improvement in our nontransaction-related operating expenses, which consists mostly of personnel costs, third-party second data and marketing. Putting it all together, our 2 most recent quarters resulted in positive net income, not something that I'm aware of with any other buy now, pay later company. Again, I have to sing the praises of our team, quite an accomplishment. As we turn to Slide 17, you can see one of the key drivers of success has been our Sezzle Premium product. Launched 1 year ago, it has grown to 155,000 subscribers and has contributed over $11 million in total income. To say there's been success is an understatement. We have found these consumers to be loyal users of our product as they shop more often and visit more of our merchants than other consumers. We are excited about this core group and the lifetime value they bring to Sezzle. You might notice that the Premium subscriber number is flat to our last disclosure. And that's because our next round of initiatives has begun, Pay Anywhere. I'm extremely excited about where we're launching next, including Pay Anywhere, but I'm getting ahead of myself. We will discuss Pay Anywhere in our next round of initiatives later in the presentation. Turning to Slide 18. Another key part of our journey has been the provision for credit losses and the launch of our machine learning model called Prophet. We have found the Prophet model to be a better indicator for identifying high-risk customers than FICO. I can't overemphasize how important that is to our business. Our ability to identify risk has been a key driver of our profitability. There is volatility and seasonality quarter-to-quarter, particularly in Q4 during the holiday season. While we expect to see movement quarter-to-quarter, we have been able to see a step function down in the level of our provision. For 2023, we are targeting a provision below last year's level of 1.7% of UMS. In the past, we said low 2s, but we believe that we will and should maintain a lower level. I am thrilled to talk about our next round of initiatives and provide a little more color than we have in the past. On Slide 19, we are restating previous disclosures that we anticipate our next round of initiatives to drive $10 million in bottom line enhancements. We recently launched one of the initiatives, Pay-in-2 as shown on Slide 20. We are the only BNPL to provide Pay-in-Full, Pay-in-2, Pay-in-4 and long-term installments in North America. A key component of a shopper's journey is having options, and our latest launch with Pay-in-2 will allow us to more easily expand in other categories where 2 payments is a more sensible option, such as grocery and monthly subscriptions. Another and likely much big -- another and likely much bigger initiative that we are in the process of rolling out is our Pay Anywhere offering as shown on Slide 21. We just launched the beta test of Pay Anywhere at the end of last week with no marketing to consumers. And we have already seen a significant take-up in a matter of days as over 5,000 users have joined Anywhere. We do expect some Premium users to shift to the new Pay Anywhere products as we now have 2 value propositions at different price points. For some users, Premium will be perfect, where we offer a lower cost and app-only shopping experience with great deals and discounts only available to Premium users. For others seeking total freedom and flexibility, Anywhere will hit the nail on the head and be worth the greater price point. For the higher price point, those users would also get access to great deals and discounts in our app, but they'll also be able to tap away wherever and whenever they want. We've already seen that the Anywhere user is more frequent than the Premium user, but we still have a lot of learning to do. We expect to have the full rollout of Anywhere in the next couple of months. Another current initiative that we are extremely excited about, which is flagged in our first quarter results announcement on the 16th of May, are our efforts on aiming to secure a bank partnership. We believe a bank partnership will enhance our abilities with the Anywhere product, further expanding our consumer base and increasing lifetime values. While there are no guarantees, this is something we continue to work diligently towards, and we'll provide an update to the market at the appropriate time. We anticipate being able to make that announcement with further details on our bank partnership during Q3. I would like to turn over the call to our CFO, Karen Hartje. She will now walk through our financials in further detail. Karen?

Thank you, Charlie, and hello to all. Before we dive in, just a reminder that our first quarter results are unaudited and presented in U.S. dollars. Flipping to Slide 23. We wanted to point out the progress over the last 3 fiscal years. Charlie highlighted our unit economics performance earlier for the last several quarters, and here, you can see the dramatic improvement on an annual basis. 2022 was an important year for us as we transitioned from a growth-at-all-cost company in previous years to a company that grows profitably. As you can see, we significantly improved our losses on an annual basis from 2021 to 2022 while still growing the top line by 9.4%. Last and probably most important was the improvement in our unit economics, which is labeled total income less transaction-related costs. We grew our unit economics by 3.5x to $46.8 million from $13.4 million in 2021. On Slide 24, you can see the same dramatic improvement for first quarter over the last 3 years. Again, we are pleased to point out the significant move to profitability on all metrics, especially net income. We are not aware of many, if any, buy now, pay later companies that have posted positive net income 3 quarters in a row. As shown on Slide 25, we have been very active with respect to our equity. We had the FORUS designation removed on May 8. We completed the reverse stock split of 38:1 on May 18 and we expect to be in a position to list on the NASDAQ around the end of the month. I would like to do a quick review of the reverse stock split as we did get a number of inquiries from individual investors. We did the reverse split in order to allow us to list on the NASDAQ. In order to list on the NASDAQ, we needed to have a minimum stock price. We chose the 38:1 after discussion with broker-dealers in the United States. Shareholders did not lose any of their ownership percentage as this was a simple math exercise. Charlie, I'm now happy to turn the presentation back to you.

Thanks, Karen. We've added some additional performance analysis on Slide 26. We compare our fundamental performance over the 2 most recent quarters reported and our year-to-date stock performance to select Australian and U.S. public online consumer lenders with operations in the U.S. A couple of points to make as we look at the chart from left to right. As we have talked throughout the presentation, we are pleased with the momentum we have developed in revenue and bottom line over the last 2 quarters and is evident compared to others. Total income rose 20% in the last 6 months compared to a negative mean of 2.9% for the group. Again, hitting home on our unit economics but also leveraging our operating expenses, we are reporting a positive EBITDA margin of 21% compared to a negative mean of 31% for the group. Not to mention, only one other company in the comp universe has a positive EBITDA. A similar dynamic exists when it comes to net income. Only one other company is net income-positive in the last 6 months reported. We have talked to many of you about the simple and clean capital structure that we have, and we believe it is evident in our net debt to market cap metric. We don't have a lot of leverage and feel very comfortable with our capital structure. We are happy to note that the market is paying attention as our stock is up 65% year-to-date. However, when we look at some of the valuation metrics such as total enterprise value to revenue or total enterprise value to active customers, we still believe there is a lot of value that is being unrecognized by market participants. More than anything, I hope this comparison shows you the opportunity ahead of us as stockholders of Sezzle. We will now take questions from stockholders and a reminder that you can submit a question by clicking on the question icon which looks like a single chat bubble. As mentioned earlier, if you are having difficulties in asking a question, please refer to the notice of meeting. I will now begin responding to the questions that have been submitted and we'll direct any questions to our auditor as relevant. I will ask our Australian Company Secretary, Justin Clyne to read out any questions at this point.

At this stage, Mr. Chairman, we don't have any questions, but if that changes prior to the close of the meeting, I will interrupt you towards the end.

Okay. Thanks, Justin. So going through the voting items. The first item of business relates to the tabling of the company's financial reports for the year ended 31st December 2022. And I note, stockholders 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 resolutions contained within the Notice of Meeting. I appoint Donna Bent of Computershare Investor Services as the returning officer. As I 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 closed. Results will be released to the ASX after the conclusion of the meeting. Please note that only stockholders, proxy holders or authorized stockholder representatives may vote. Any directed proxies given to you by the stockholder 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 the options to cast your vote. When the voting is closed, the final voting selection will be recorded. If you have any difficulties, please refer to Notice of Meeting. 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 otherwise direct. The resolutions to be considered in order are Item 2, reelection of Charlie Youakim; Item 3, reelection of Paul Victor Paradis; Item 4, reelection of Paul Purcell; Item 5, reelection of Paul Alan Lahiff; Item 6, reelection of Michael Cutter; Item 7, approval to issue restricted stock units to Executive Director, Charlie Youakim; Item 8, approval to issue restricted stock units to Executive Director, Paul Paradis; Item 9, approval to issue restricted shares to Non-Executive Director, Paul Purcell; Item 10, approval to issue restricted stock units to Non-Executive Director, Paul Lahiff; Item 11, approval to issue restricted stock units to Non-Executive Director, Michael Cutter; and the ratification of the independent accounting firm selection. The Board's recommendation in respect to each resolution is outlined in the Notice of Meeting. And details of the proxies received prior to the proxy cutoff date for each resolution are contained within the presentation released to the ASX this morning. I would like to advise that, shortly, the voting on all resolutions will close. We will now take a few minutes to allow you to finish voting. Please complete your voting now. Voting will close automatically in 1 minute.

Mr. Chairman, while we pause for voting, I confirm there's no further questions.

Okay. Thank you, Justin. [Voting]

Voting has now closed. Please note that the final results will be advised to the ASX and also made available on Sezzle's 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.

This concludes the meeting. You may now disconnect.