Good morning, and welcome to the Katapult Holdings Q1 2023 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Jared Pollack, Investor Relations. Please go ahead. Over to you.

Welcome to Katapult's First Quarter 2023 Conference Call. On today's call are Orlando Zayas, Chief Executive Officer; Nancy Walsh, Chief Financial Officer; and Derek Medlin, Chief Operating Officer. Materials from today's call can be found on the Investor Relations section of the Katapult website. I'd like to remind everyone that this call will contain forward-looking statements regarding our financial performance, our business outlook and related assumptions that are subject to significant risks and uncertainties. These forward-looking statements should be considered in conjunction with cautionary statements contained in the earnings release and on Form 10-Q for the quarter ended March 31, 2023, as well as the subsequent periodic and current reports the company filed with the SEC. These statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements. The information contained in this call is accurate only as of the date discussed. Except as required by law, the company undertakes no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. During today's discussion, the company will provide certain financial information that constitute non-GAAP financial measures under SEC rules. These non-GAAP financial measures should not be considered replacements for and should be read together with our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is included with today's earnings release and is available on the Investor Relations section of the company's website. I will now turn the call over to Orlando.

Thank you, Jared. Good morning, everyone, and thank you for joining us. We are pleased to share our Q1 2023 results with you today. Before we do that, I'd like to thank our team for their dedication to Katapult and for reinforcing our mission and values. I would also like to further recognize all of their hard work that drives our growth and profitability strategies. It is that dedication that has resulted in a record NPS score of 63. Let me now begin by providing some key financial highlights from the first quarter. We had an outstanding Q1. Our gross originations increased 17.3% year-over-year to $54.7 million. Revenue decreased 7% year-over-year to $55.7 million, which continues to reflect sequential improvements due to strong collection efforts and underwriting performance. And we achieved adjusted EBITDA of $0.6 million, the first quarter of positive adjusted EBITDA since Q3 2021. Fixed cash operating expenses decreased by 17% compared to last year. Overall, our first quarter 2023 results reflect continued strong demand for lease-to-own products and e-commerce channels that support underserved non-prime consumers who are unable to access traditional financing for the durable goods they need. With over 30% of American consumers overlooked by traditional financing options and 39% of Americans not being able to cover $400 of an emergency expense without assistance, Katapult's omnichannel and digitally native lease-to-own platform enables consumers to get what they need, when they need it and connects merchants to a new market of engaged and loyal customers. Looking forward, we continue to execute on our 4 pillars of growth to drive increased revenue and improved profitability. The first pillar is to expand our current relationships and grow our merchant base and there are 3 distinct areas we are focused on: one, continue to deepen relationships with our existing directly…

Thank you, Orlando. I'm excited to talk to you today about our strong first quarter 2023 results and provide an update on the second quarter. As Orlando mentioned, our operating priorities are centered around driving revenue growth while executing a path to profitability. With that, for the first quarter of 2023, gross originations increased 17.3% year-over-year to $54.7 million. Increased originations were driven by higher wallet capture during tax season through our direct merchants and mobile app channels as well as the continued expansion of merchants on our mobile app marketplace featuring Katapult Pay. Katapult's portfolio of direct merchants provides a funnel of new customers to drive gross originations at minimal customer acquisition costs. During the quarter, our repeat customers accounted for approximately 47% of our customers and the engagement of repeat customers through our mobile app continues to grow. As a reminder, gross origination trends are a leading indicator of future revenue streams. A percentage of revenue is realized in the quarter in which the gross origination occurred and increases cumulatively over the following quarters. reaching approximately 70% to 75% of revenue recognized within 2 quarters from when the originations occurred. We are also pleased to see write-offs as a percentage of lease revenue decline sequentially to 8.4% from 9.7% in Q4 2022. Q1 2022 write-offs as a percentage of lease revenue was 6.3%, reflecting the positive impact of COVID-related stimulus. Revenue decreased 7% year-over-year to $55.7 million, which reflects sequential improvement due to strong collection efforts and underwriting performance during the quarter. We were pleased with our adjusted EBITDA results of $600,000, reporting the first quarter of positive adjusted EBITDA since Q3 of 2021. Growth in adjusted EBITDA was driven by more efficient lease costs and our ongoing expense reduction initiatives, which encompasses all areas of spending and…

[Operator Instructions]. Our first question is from the line of Josh Siegler from Cantor Fitzgerald.

Congrats on the adjusted EBITDA profitability this quarter. I'd love to dive a little deeper into Katapult Pay. So how much more opportunity is there to expand the direct-to-consumer product? And which marketing channels are you prioritizing to bring in new users?

Josh, this is Derek, and thanks for the question and for joining the call today. We're really excited that we're in the early innings of Katapult Pay and what it's meant for our business. It certainly has been a great new add for us in terms of us being able to manage our relationships with our consumers and drive more engagement. And that engagement has turned out to really drive faster transactions and more repeat purchases from this community, which in turn is driving a better LTV and a higher LTV for us for these consumers and these customers of ours. And that's done by basically being able to open up the funnel of other places where they can do transactions with new retailer partners and by having just a more engaged consumer. So what we are doing in terms of prioritizing things is we're looking at one, ways per more engagement, more adoption of the Katapult Pay and the Katapult app. Second of all, by having targeted retailers that open up new categories for our consumers to purchase. So just making them aware of all the different ways that they can use our partnership with Katapult in their everyday lives and to help them support transactions. And then lastly, we're looking at testing new marketing channels to attract consumers to this app. Some of that's done through our retail partners and some of that's through new channels that we're exploring. So since it's the early innings, nothing to really report today, but I'm excited that these are going to open up new growth strategies for us today and in the future.

Yes. Understood. Looking forward to tracking that progress. And then you guys mentioned the benefit of prime credit tightening and acting as a countercyclical tailwind for the business. I'm curious if you've started to experience that credit timing from the prime players? And how much of a tailwind do you expect it to provide in 2023?

Josh, it's Orlando. Thanks for the question. We've seen it. So I have a tracker that I look at that shows kind of the flow of credit, if you will, by credit band to us. And we started seeing it in October and it doesn't happen -- it didn't happen as quickly as it did during the COVID days. On March 16, we saw a huge reversal, if you will. But we're seeing it happening. I think because -- other than Katapult Pay, we're pretty reliant on the waterfall that we can see it pretty easily when the credit bands start shifting, if you will. And we saw that shift in October and it continues to today. I think it's going to continue through this year because you've heard some of the bank issues. And as they tighten up and try to -- it becomes less available for prime lenders. Obviously, it flows down to us, and it's definitely -- as you know, this business is very countercyclical.

Got it. All right. And congrats again. .

Thanks.

Our next question is from the line of Anthony Chukumba from Loop Capital.

Congrats on a strong quarter as well, and I promise I won't be too hard on you guys. Just a bit of a clarification. So you mentioned that you're -- with the Wayfair Way Day, you more than doubled your originations. Is that year-over-year compared to Wayfair Way Day 2022? Or is that sort of like sequential relative to sort of like your typical originations with Wayfair?

Yes. It was the average -- thanks, Anthony, for the question, and thanks for not being too hard on us. It was definitely an average. Like if we look at the -- it was Wednesday, Thursday, Friday, if we look at the averages for the last -- I think we looked at the averages over the last 6 weeks. We more than doubled it during those 3 days, which was very promising. Their business is obviously very important to us and they continue to be a great partner, and we did a lot of co-marketing ahead of it and got a nice pump those 3 days.

Got it. Okay. That's helpful. And then just one bit of clarification. You mentioned that your write-offs declined 130 basis points sequentially. What was the -- what was that year-over-year?

So year-over-year, we talked about that the 8.4% compares to 6.3% in 2022, but that really was more of the anomaly because it reflected the positive impact of the COVID-related stimulus at that point in time. So we consider this to be more of a run rate for us and expect as the vintages post COVID continue to mature, we are expecting to see this to continue to improve.

This concludes our question-and-answer session. I would like to turn the conference back over to Orlando Zayas, CEO, for any closing remarks.

Thank you, operator, and thank you all for attending the call today. In closing, we delivered first quarter 2023 results in a strong manner, and our momentum is encouraging. We're excited about the opportunity ahead of us and remain focused on executing our growth and financial strategies. I look forward to updating you on our mission to provide underserved nonprime consumers the flexibility they deserve to access the durable goods they need. Thank you for attending the call today.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.