Good day, and welcome to the Sezzle Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Charlie Youakim. Mr. Youakim, the floor is yours, sir.

Thank you. Thank you, and good afternoon, everyone. Welcome to Sezzle's Second 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; 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. 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. It's exciting and fun at the moment at Sezzle as we've noticed, we continue to disrupt the existing payments industry. I'm sure you've noticed it just like we have as it seems like there's an article coming out every other week in a major publication talking about the growth of BNPL and its impact on the world. Some of these publications get it and understand that this product helps consumers budget and manage their spending. And others don't and just regurgitate the standard consumers using credit as bad mantra that's been out there since the invention of the credit card. Even with the negative press, we're happy as it means that we must be doing something right as we are upsetting the traditional norm. We are getting noticed. With that credit mantra in mind, we do think our path somewhat mirrors the original buy now, pay later product, the credit card. Credit cards first emerged in the 1950s. Now I imagine most of the people on this call weren't around then. But…

Thanks, Charlie, and good evening, everyone. As Charlie mentioned earlier, you'll see through our numbers that our initiatives continue to drive remarkable top line growth, easily clearing our internal Rule of 100. Turning to Slide 9. Second quarter total revenue grew 76.4% year-over-year to $98.7 million and adjusted net income nearly doubled, growing 91.8% year-over-year to $24.4 million. GAAP net income decreased slightly to $27.6 million, resulting from the recognition of an outsized $17.2 million discrete tax benefit in the second quarter of 2024 compared to a $3.2 million discrete tax benefit in 2025. As a reminder, the prior year's discrete tax benefit was attributable to the release of our deferred tax valuation allowance due to the company's profitable trajectory. Our margins also continued to expand with adjusted EBITDA margin and total revenue less transaction-related costs as a percentage of total revenue, improving 5.5 and 3.5 points, respectively, year-over-year. Lastly, despite our rapidly growing revenue and healthy margins, we still maintain strict cost discipline. Nontransaction-related operating expenses as a percentage of total revenue decreased 4.8 points year-over-year to 28.1%. Let's move on to Slide 10, which breaks out our GMV and total revenue progression. GMV grew 74.2% year-over-year, driven by new product adoption and higher consumer engagement. Total revenue as a percentage of GMV, our take rate improved slightly year- over-year to 10.6%. The sequential decrease aligns with historical trends as our first quarter take rate benefits from 2 main items. The spillover of payments from fourth quarter transactions in the first quarter and the decline in purchase frequency from subscribers compared to the holiday season in the fourth quarter. On Slides 11 and 12, we detail our transaction-related costs, which include transaction expense, provision for credit losses and net interest expense. These costs totaled $38.4 million or 4.1% of…

[Operator Instructions] The first question we have will come from Mike Grondahl of Northland.

Two questions. One, the 748,000 mods, could you talk a little bit about the mix of those between On-Demand, Premium and Anywhere, how those have trended and then kind of the profitability? And second, on the investment side in 2Q, is that primarily marketing that you're calling out the $8.8 million? Is there any other investment to kind of call out or make us aware of? That would be great.

On the second question, Mike, it's really the marketing investment on that line. So just $8.8 million. And then on the mods, the primary area of growth in the mods number was mostly On-Demand because it's a new popular product, which is kind of working the way we thought it would. It's a lower barrier to entry, getting more consumers into our -- the consumer side of our business essentially, where they're making the choice to pay us directly. But subscribers, I think that they've actually held pretty well over this time period. And that's why we -- I think a couple of quarters back when we launched On-Demand, we said expect some waviness in the numbers with subscribers because we know that On-Demand in a way like mindset kind of way it's a little bit competitive to the subscription products we have. But I'd have to say we're pretty happy with where things are going. So -- but the split has been probably a lot of growth in On-Demand.

Got it. And how different is the profitability between an On-Demand customer and Premium or Anywhere?

It sounds like radically different. Anywhere is the most profitable because there's just so much usage. Like once you basically decided to subscribe to that product, it's like the customers made -- they've dived in. They -- of course, with our NPS scores, they definitely love our product, and they just kind of dive in and say, I want to use this everywhere. And when you have more activity in the product, you get more profitability. Premium is a higher margin product than the others. And so it -- maybe it's a little bit less than Anywhere in terms of like usage per month or per time period, but it has such good margins that it does quite well. And then On-Demand is just -- it's the lowest of the 3 right now in terms of margin as well as lifetime value because of the combination of some of these customers are using us once just to try it out. So as a whole, it ends up being in third place out of those 3. And so now we actually -- even internally as a company, we really -- we're already starting the process of getting these On-Demand customers and having them start to market to them to get into subscription products as we -- it was the whole idea, get the customers in, let them kind of try us a little bit more, a little bit more trial before we basically recommend to them that a subscription product might be a better choice for you over time. And then once you get the customer into subscription, then they're kind of all in before they might have been dabbling into Sezzle, maybe dabbling in the competitor product. But once they made that jump in, now they're in. So that's the breakdown. It's actually pretty much as we expected when we launched. We have that kind of rank order.

And maybe just one more there. Did Premium or Anywhere grow year-over-year? Or would you say most of that year-over-year growth was On-Demand?

Most of it was On-Demand, but anywhere it grew as well. Premium is probably taking the biggest hit of the 3 products with On- Demand coming into the mix.

And next, we have Rayna Kumar of Oppenheimer.

This is [indiscernible] on for Rayna. Just a quick question. Given the volatile macro environment in a scenario where consumer credit quality starts to erode, can you just give us a little more color on how you're underwriting and expense management may evolve?

Yes, if we ever see anything, we monitor default rates daily through our systems. And one of the nice things about the product, we talked about comparisons to credit cards, compare and contrast credit cards on the call here. Credit cards from my understanding, if you want to lower someone's credit limit, you got to give a 45-day advanced warning and then after that notification, you have to wait that time period and then you can make adjustments. And one, I'd say, from our standpoint with buy now, pay later, we don't have that sort of restriction. We can actually move limits today. Like if we saw something today we didn't like, and we thought it was maybe economically related, we could reduce limits across the board, which is basically something we do in the holiday period, honestly. Like when we look at holiday period, we don't want people overspending. So that's why we just feel so good about this product as I'm an investor in the company, a lot of the people on the call here. We're all investors in the company as well. And that's what I think helps us sleep well at night as we know that if something comes up, we can always adjust things down. Of course, that will affect your payment volumes and maybe some of the top line, but then you can control loss rates much better than a lot of other financial services products. So in a shaky economy, I think that we're probably one of the best credit products you could ever be a part of on an investor side because of the flexibility and how fast we can move.

Okay. Yes, that makes a lot of sense. What are you guys seeing out there in terms of the competitive landscape? Any changes specifically in pricing from your competitors?

No, not really. People always ask us about the competitive landscape, and I -- the 2 most heads up to us, I'd say Klarna and Zip and then maybe after pay next run for us and then Affirm, PayPal, next round. And it's not -- I'm not talking about quality of company when I'm saying this like list. It's more about who has the products and services that are most similar to ours when we -- from the customer standpoint. And so when we look at that landscape of competitors, first of all, they're all really good. But we haven't really seen much changing in terms of pricing or offerings.

Okay. Yes. No, that makes sense. And then just one last quick one. Can you update us on your lawsuit with Shopify? And what are any potential implications in the timing of that?

Yes, there's no update at this point. I think there's any major updates. We'll let our investors know. But we're not expecting this to be super speedy in terms of the processes, just lawsuits in general are just not the fastest moving entities out there. It could be something that could take maybe upwards of 3 to 5 years in time frame. That's probably the max. But at this point, no real update.

And next, we have Hal Goetsch of B. Riley.

My question is like all your metrics are up into the right, Active Consumers, active unique merchants. I mean, just -- it's all terrific. What was volatile, I think, maybe sequentially your effective overall take rate. And on that has been pretty steady and had -- maybe Q1 was a really outsized good number. And I wanted to get your perspective on that and how we should think about it like seasonally or over time or quarter-to-quarter?

Yes. Great question, Hal. Yes, Q1 was probably just a massive anomaly out there because I think we're north of 13% on take rate on volume. And a lot of that was due to -- and we explained, it's a lot of seasonality. So what happens in fourth quarter, we have generally larger GMVs coming through the company. But because of the way revenue is recognized on fee revenue, when the payments are actually made from customers, if there's a late fee attached, that actually is recognized as incurred. So a lot of the payments from the fourth quarter going to the first quarter, which has a lower GMV because of seasonality, but the revenue is coming into the first quarter. So it's not like I know GAAP is always trying to go for matching to help investors. I think in this case, it doesn't really help investors the way that GAAP is forcing revenue recognition because we provision for losses in the fourth quarter, but we're not provisioning for the revenue in the fourth quarter as well. We actually take that as incurred into the first quarter. And so if you look back at like fourth quarter, third quarter, fourth quarter might be the best one to look at. We're actually pretty comparable in terms of the top line. But one thing I'd say to call out, though, is we actually have done a lot of efforts to move customers to pay us back with ACH as well, which also lowers the top line, but also lowers cost of processing, too. So that's why our gross margin, the non-GAAP gross margin is over 60%. When I think you look back at the third quarter to fourth quarter last year, we're lower than that. So even though the top line might be much lower than the first quarter, our cost of transaction processing went way down relative so that the gross margin is actually north of our 60%.

Okay. So basically, GMV from Q4, most of the -- especially December weighted, you're going to have all those payments in January. On-Demand fee, you have revenues from -- I got it. It makes -- that's really helpful in understanding.

Q1 is the harder quarter to like basically -- you can't -- it's not an annual -- don't annualize that quarter because of the revenue recognition.

So with a lot of subscribers, it could very well be a 13 number next quarter, Q1 as well. It's just you need to be ready for a step down in that when that back half weighted December shopping doesn't happen in the second quarter, third quarter.

Yes. So basically, if we get lots of utilization on subscribers, then the top line comes down a bit. And then when you have lower utilization, like the lower GMVs per user, but the fees come in, then the top line comes up because the revenue recognition is on the lower volumes in the first quarter.

[Operator Instructions] At this time, there appears to be no further questions. We will go ahead and conclude today's question-and- answer session. I would now like to hand the conference back over to management for any closing remarks.

Thank you. Once again, a big thank you to our team. We continue to scale the business wonderfully. Part of that reason for that is our business does just scale well. But the other reason we're scaling so well is because the Sezzle team is loaded with talent and stars, which means we don't need to keep on adding people as our people do more than most. And I always say this one, they call it a company for a reason, and our company just happens to be damn good. And finally, a fun story for Warren Buffett to close the call. Warren Buffett once gave a talk to a group of MBA students and said something surprising. He held up an imaginary punch card and told them, "I could improve your ultimate financial welfare and your emotional well-being by giving you a punch card with only 20 punches in it. That's all the investments you get to make in your entire life. Once you use those 20, you're done". The room got quiet and Buffett continued. "Under those rules, you really think carefully about what you did. You do your research, you'd wait patiently and you'd bet big when you had real conviction. And because of that, you end up doing far better than the average investor." Here, Buffett wasn't only talking about stocks, he was talking about life decisions, what jobs you take, who you work with, who you marry, which partnerships you form, which businesses you start. You only get so many shots at things that truly matter. Buffett continued. "Most people go through life making decisions with no real costs. They over-diversify. They chase every opportunity. They constantly shift focus. But if you had a punch card every time, you'd concentrate your time and energy on what really matters". Personally, I strongly agree with Buffett on this one, and I hope that we can continue to attract high conviction investors that agree with this mindset. Thank you all for listening in today. We hope you have a great rest of your week.

Thank you, sir, and to the rest of the management team for your time also. The conference call is now concluded. At this time, you may disconnect your lines. Thank you, again, everyone. Take care, and have a great day.