Earnings Labs

Sezzle Inc. (SEZL)

Q1 2025 Earnings Call· Fri, May 9, 2025

$79.92

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Transcript

Operator

Operator

Good afternoon, and welcome to the Sezzle Inc. First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference to Charlie Youakim, CEO. Please go ahead.

Charlie Youakim

Analyst

Thank you, and good afternoon everyone and welcome to Sezzle's first quarter conference call for 2025. I'm Charlie Youakim, CEO and Executive Chairman of Sezzle. I'm joined today by our Chief Financial Officer, Karen Hartje; our President, Paul Paradis; and our Head of Corp Dev and IR, Lee Brading. In conjunction with this conference call, we filed our earnings announcement with the SEC and posted it and the earnings presentation on our investor website at sezzle.com. To retrieve the documents, please go to the Investor Relations section of our website. There you will find the press release and the earnings presentation under the Investor Relations section. Please be advised of the cautionary note on forward-looking statements and the reconciliation of GAAP to non-GAAP measures included in the presentation, which also covers our statements on today's call. I'm looking forward to discussing our first quarter results with you all as this quarter marked the 12th straight quarter in which we have posted positive year-on-year improvements in revenue and operating income. It's an exciting time for the payments industry and especially buy now pay later as our sector continues to grow and gain market share. Even as we're gaining on other payment methods, we still represent less than 10% of the payments market. We believe that our sector will continue to gain share as we gain share within it. We also believe that it is a great time to be in the buy now pay later space as there is a heightened level of uncertainty in the economy. Consumer sentiment is dropping and many consumers seek out flexibility in their finances in uncertain times. BNPL provides that wanted flexibility and allows payments to be matched to budgets. We have said this before, but we will say it again now, BNPL is aligned…

Karen Hartje

Analyst

Thanks, Charlie, and hello to everyone joining us today. Diving into our first-quarter numbers on Slide 8, you'll see the momentum continues. We're maintaining our upward trajectory with another strong quarter fueled by disciplined growth, improving unit economics, and the expanding impact of our Bank Program. As Charlie mentioned at the start, we easily met the Rule of 40, and for that matter, our own Rule of 100. Total revenue increased 123% year-over-year to $104.9 million, and our adjusted net income grew 286% year-over-year to $36.1 million. The substantial acceleration of growth rates at the top and bottom lines is meaningful, reflecting stronger monetization per dollar of GMV, thanks to both our MDS Program and the unified fee structure under the Bank Program, all while keeping our expenses in check. Slide 9 shows our GMV and revenue yield in action. Total revenue surpassed our fourth-quarter holiday shopping period, with our take rate rising to 13% of GMV. Our take rate tends to take a step up from Q4 to Q1, as GMV tends to dip after the holiday season, but we still have the seasonal spillover of payment activity from the fourth quarter that occurs in the first quarter. Additionally, strong subscriber engagement and a full-quarter impact of our partnership with WebBank drove total revenue yield to lead sequential quarter-over-quarter growth, despite the seasonal drop in GMV. On Slides 10 and 11, we break down our transaction-related costs, transaction expense, provision for credit losses, and net interest expense, as you can see in the breakdown, our transaction expenses substantially benefited from our provision for credit losses, as we realized better-than-expected consumer repayment behavior. We remain focused on driving more consumers through the funnel, and we still expect the provision will trend higher over the remaining quarters of 2025 within our…

Operator

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Hal Goetsch with B. Riley Securities. You may now go ahead.

Hal Goetsch

Analyst

Thank you. Congratulations on a terrific start to the year. My first question is can you just tell us a little bit about your funnel of new merchants -- what types are they? What size are they? It just seems to me that the BNPL is really kind of broadening out. I want to know, what are the kinds of retailers that are knocking on your door you're reaching out to?

Charlie Youakim

Analyst

Thanks Hal. Yes. So the funnel is great. Obviously, we can't announce any names in our funnel and our pipeline. But we tend to focus more towards enterprise-level merchants now, although we do have a midsized funnel as well. But many of those merchants don't -- they tend not to be like the more name brands that you would ever announce. So, even as we sign and close those midsized deals you're not seeing a lot of those announcements or you probably won't. But it's definitely a focus towards the larger side of the equation. I don't know Paul, do you have anything to add on that?

Paul Paradis

Analyst

Yeah. I think that's right, Charlie. I would add that we are starting to push into new categories where BNPL has been late to be adopted. If you go back to the start of BNPL it was heavy in discretionary categories but we're seeing a push in categories like grocery bills. So we're starting to make headway in some new categories that are new to our industry in general as well.

Hal Goetsch

Analyst

Okay. And when you find these new verticals are you the solo logo on it? Or are you another choice for BNPL from another -- maybe another provider that's well known?

Charlie Youakim

Analyst

Paul, do you want to answer that?

Paul Paradis

Analyst

Yes. Typically what happens is a merchant will want to test the waters with one BNPL provider first and you'll sign an exclusive contract with that merchant for a period of time. And then once that contract is up sometimes they'll re-up, but sometimes they'll look to add additional providers so they can capture the loyal customer bases of different providers. So we are starting to see more and more merchants adding more BNPL providers since we have our own captive user bases.

Hal Goetsch

Analyst

Okay. And last question for me I'll go back in the queue. But can you just share with us like -- what is the frequency or the uplift you're seeing from on-demand? You're only about maybe two quarters into this. Could you share any more details with us on what you're seeing with on-demand exclusively from say monthly subscribers who are paying you a monthly fee?

Charlie Youakim

Analyst

Yes. I would say that what we're seeing is monthly sequential growth right now which tells you we've got really a winner of product on that. And the other thing that I think is attractive with on-demand is that on a per user level like the gross margin per user at like same cohort stage seems to be relatively similar to premium in one of our existing subscription products. So has a lower barrier to entry which allows us to bring more consumers into the funnel which we love. And then once we've got them in on demand and using us with on-demand that's where we're starting to use the opportunity to start to market our subscription products for them. Like if you're using frequently maybe you want to just sign up for the subscription because it's a better bargain for you.

Hal Goetsch

Analyst

Okay. And I guess one last question on the notes receivable. It looks like despite this growth your outstanding, kind of, fell. I guess, maybe December is a back half loaded kind of month where you have a lot of a little bit more seasonally higher receivable balance on December 31 and maybe a more even pace of spending throughout the first quarter?

Charlie Youakim

Analyst

Yes I think that's some of it. Karen, do you have anything to add on that or...

Karen Hartje

Analyst

No, I think we do have heavy receivable growth in fourth quarter because of the holiday season. And then the payments are coming in on that in January. So January -- early in first quarters are heavy payment receipts period based on seasonality.

Hal Goetsch

Analyst

Yes. Okay. Because this looks like you generated a ton of free cash flow in the first quarter when those payments came in. Sorry.

Karen Hartje

Analyst

That's typical of our quarters.

Hal Goetsch

Analyst

Yes. Sorry. Thank you. Good luck. Good job.

Charlie Youakim

Analyst

Thanks, Hal.

Operator

Operator

[Operator Instructions] Our next question will come from Mike Grondahl with Northland. You may now go ahead.

Mike Grondahl

Analyst

Hey, guys. Thanks and congrats on a very robust quarter. A couple of questions. Are you able to quantify or give us a sense of the WebBank partnership and the financial benefit you saw there having a first full quarter?

Charlie Youakim

Analyst

I think probably the best way to do that is probably just go look year-on-year differences in profiles of the company. If you look at fourth quarter to first quarter last year versus fourth quarter to first quarter this year maybe a couple of quarters more, I think you'll start to see like where WebBank is helping us. And it's I mean I think the gist is look at our revenue yield as a percentage of GMV. That's a big part of it because there was a number of states where we were running suboptimally because we're going state by state. With WebBank we basically just ran the product as designed through web offering the lending product and not Sezzle. So I think that's basically where you can probably pick up a lot of the difference is. I know some of that -- it's not a true AB because we've got other products in the mix but I think you'll kind of get a sense looking at year-on-year.

Mike Grondahl

Analyst

Revenue yield. Got it. Got it. And then - the 658000 of on-demand and monthly subscribers mods now you talked about the stickiness of those monthly subscribers. What would you attribute that stickiness to your shopping experience just the overall consumer experience? It sounded like you were surprised by how strong how sticky the monthly paying subscribers were. So just like a little more color there.

Charlie Youakim

Analyst

The story I kind of give when I think about this is, I think early days credit cards, because early days credit cards were kind of similar to early days buy now pay later not that I was alive back then but from what I've read. But imagine like you have a Chase card and you go into a restaurant they're like, oh, we only accept Amex here. Now you have to have an Amex card to shop at be at that restaurant or be at that store, which I think early days credit card that basically what was happening. So, early days BNPL same kind of thing. You've got to have Sezzle to shop at this store you got to have one of our competitors to shop at another store that can be kind of annoying I think for a customer. And so with our subscription product and now on-demand, I think it just creates like an ease of mind or ease of use aspect to the product. I don't have to care what that store thinks I should use. I can just -- the heuristic I can just use Sezzle. I don't have to think about it. I'm going to get paid for. I like how Sezzle operates. I like their app. I like the functionality. I can just go in there and tap now, because I've got anywhere or premium or on demand. And I think that just creates an ease of use for the -- which is value for the customer. And now they can use that card everywhere, just like you probably use the same credit card everywhere if you just don't want to think about it. So that's what I would think it would be.

Mike Grondahl

Analyst

Fair, fair, okay. And then I get asked a lot about credit quality. The 1.6 was nicely lower than where you guys were thinking it was going to be. And I know you've loosened credit quality, and clearly we've seen that in the volume. Could you just talk about how you're managing credit quality? I think that would be helpful. And then I have one more after that.

Charlie Youakim

Analyst

Yes. We know our profitability levels are a lot stronger year-over-year, which basically we're shooting for that 60% type gross margin. And so if you know that your top line is at a higher level you can accept a little bit of a higher cost to still hit the same gross margin and that cost PLR that we're talking about. So that allows us to be a little bit more open. But I mean trust me, we're not trying to just open up to grow volumes. We think about it in terms of ROI and in terms of maintaining gross margins that we like to maintain. So that's probably why we came in where we did. Plus with first quarter, there's always provision. And so in fourth quarter we have to provision, which is an estimate of what we think the losses will be on those loans. And we had a little bit better than expected results as well. So that led into the 1.84 or the number for the first quarter, the PLR because we have to make an adjustment when things come in better than we expected. And then the first quarter itself is just a good quarter for this customer, because they tend to be getting tax refunds. So that all kind of played into it. But we kind of -- we gave that guidance of like the 2.5% to 3% PLR for the year. And for now, we're sticking with that. We still think that that's probably the right range even though the first quarter is coming in much lower than that.

Mike Grondahl

Analyst

Got it. And then just lastly, could you give us a little bit of color about Pay-in-5 and auto couponing, just describe those at least?

Charlie Youakim

Analyst

Yes. So Pay-in-5, we did a survey to our customer base and it was -- and not just our customer base but also BNPL users outside of our customer base, and asked them Pay-in-5 versus Pay-in-4, what do you like? And I know some of it kind of seems common sense someone would take an extra payment, but the results were really surprisingly positive. And so, I think most of business is common sense quite frankly. I don't think a lot of it is rocket science. And when our customers and other potential customers are saying that they would really love that type of a product, we are like okay let's get that in the mix and try it out. And what we're seeing so far is it looks pretty good. Like, we're pretty happy with the results thus far. It's still early. It's less than 10% of our volume at this stage. And so, that's really the gist of it. It's nothing like extravagant. It's just basically instead of it being a 6-week product, it's an 8-week product with slightly lower payment amounts. And customers just like that from what we're seeing. So we feel good about that. We're probably going to keep on increasing volume to pay in five as long as we keep on seeing good results in terms of profitability, in terms of repayment, in terms of uptake from customers. And then auto couponing, basically the idea behind that is just keep on helping our customer. So, our customers is mid to low income younger customers. And if you can surprise and delight them by all of a sudden they're shopping at Dave's Sporting Goods and we found you a $15 coupon that you didn't even know existed, well you're going to remember that. No doubt about it. These customers will remember it. That will create loyalty and retention and keep them around our ecosystem. And that's really the idea there. It's not -- we're not doing a lot on the shopping side I'd say to increase profitability levels. It's more about just giving this customer tons of value for being in the Sezzle ecosystem. That's the main part of it right now.

Mike Grondahl

Analyst

Fair enough. Thanks guys.

Operator

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Charlie Youakim for any closing remarks.

Charlie Youakim

Analyst

Thank you, operator. And also a big thank you to the Sezzle team. We continue to execute on a high level which is why we continue to outperform in our results. I'm sure of it. And in closing out of homage to Warren Buffett in his upcoming retirement, I'd like to tell a Warren Buffett story to end the call. In the early 1960s, American Express was embroiled in a huge scandal, a company called Allied Crude Vegetable Oil used fraudulent collateral, barrels filled with mostly water not oil to borrow millions from banks using Amex's letters of credit. When the fraud was exposed, Amex stock plunged by over 50% and everyone thought the company might collapse. Warren didn't panic. Instead he dug in a little deeper. He realized that despite the scandal, the core Amex business was doing just fine. He talks to bank tellers, bank officers, credit card users, hotel employees and restaurant workers to get a feel of whether usage had fallen off. Based on that research, Buffett concluded that while Wall Street had punished Amex by battering the stock price Amex's reputation hadn't been tarnished on Main Street. The research led to a very large investment in Amex at that time. Buffett invested around $20 million in Amex which is over 40% of its fund size and around 5% of Amex's market cap. The results, Amex stock tripled from that point within a couple of years and became one of the first home run investments for Buffett. Warren's lesson and his quote -- the stock market is a device for transferring money from the inpatient to the patient. That's the story. Cheers to the patient long-term holders of Sezzle. Have a great evening everyone and thanks operator. We'll end the call now.

Operator

Operator

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