Good day, and welcome to the Sezzle Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Charlie Youakim, Executive Chairman and CEO. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Sezzle's Third Quarter Earnings Call. 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 Corporate Development and IR, Lee Brading. In conjunction with this call, we filed our earnings announcement with the SEC and posted it along with our earnings presentation on our investor website at sezzle.com. To retrieve the documents, please go to the Investor Relations section of our website. Please be advised of the cautionary note and forward-looking statements and reconciliation of GAAP to non-GAAP measures included in the presentation, which also covers our statements on today's call. If you're a long-term investor of Sezzle, you're already well aware of how good this team is at navigating and adapting our business model and our product solutions. I continue to be impressed by our team and our ability to adjust and adapt. We're always looking for ways to create win-wins with our stakeholders and also balance profitability, growth and customer satisfaction. 2025 has been more of the same on that front. We've been testing our launches of on-demand and our shopping solutions and making incremental improvements and adjustments along the way with a strong weighting towards making our customers' lives better while also continuing to grow with strong profitability metrics. We still believe that BNPL is in its early days and that we are likely to have years upon years of industry growth ahead of us. And we also believe that we're bringing to market a product that is fundamentally a better and more user-friendly credit product than a credit card. Our company and our BNPL industry in general, is 100% aligned with responsible repayment of short duration loans that really lean into the concept of budgeting…

Thank you, Charlie, and good evening to all those joining us. The enhancement of our product experience and deeper consumer engagement drove remarkable results for the quarter, as seen on Slide 8. Total revenue continues to grow at an exceptional pace, increasing 67% year-over-year to $116.8 million. Our profitability followed a similar growth trend with GAAP net income and adjusted net income growing over 50% to $26.7 million and $25.4 million, respectively. Our margins held steady year-over-year with an adjusted EBITDA margin of 33.9% and total revenue less transaction-related costs of 54.2%. Most importantly, alongside our growth is our ability to scale efficiently, evidenced by our non-transaction-related operating expenses decreasing 2.9 percentage points year-over-year to 27.1%. Now turning to Slide 9, which highlights our top line growth. GMV increased 58.7% year-over-year, making our first $1 billion quarter. As Charlie discussed earlier on Slides 6 and 7, growth in active consumers and higher transaction frequency drove this milestone. Our take rate, defined as total revenue as a percentage of GMV rose 60 basis points, both sequentially and year-over-year to 11.2%. The focus on high LTV products that Charlie outlined on Slide 5 is a key driver of take rate strength, and we believe that focus positions us well to sustain this rate going forward. On Slide 10, we note our transaction-related costs with detailed components outlined on Slide 11. Overall, transaction-related costs as a percentage of total revenue and GMV increased year-over-year due to our strategic decision to expand our underwriting aperture and drive top line growth. Specifically, third quarter provision for credit losses as a percentage of GMV increased 70 basis points year-over-year to 3.1% and is trending toward the lower half of our stated 2025 provision target likely between 2.5% and 2.75%. Despite the slightly higher transaction-related costs, total…

[Operator Instructions] The first question comes from Mike Grondahl with Northland.

Maybe the first one for Charlie. Charlie, can you talk a little bit about when you deemphasized on-demand in Q3? And how you think that's going to affect sort of growth going forward, if at all?

Yes, it was probably right around the middle of the quarter. At that point, we felt like we had enough data based on what we had been seeing on conversion at point of sale, conversion into subscription. And the bridge just wasn't as strong as we were originally envisioning, I guess, is the main point. Conversions, I think, were slightly better into on-demand at point of sale than they are into subscription, but just not enough to make the payout worthwhile. And so when we started to analyze the lifetime values of the customers, the conversion rates, we really started to realize that on-demand is probably just a better tool around the fringes and at least in the direct-to-consumer portion of our business. It's still part of the mix, but it's really the tool that we're going to lean into more on the merchant side to win over more enterprise merchants that are sensitive to margin pressures, et cetera. And then on the consumer side, we really just want to lean back into subscription and maybe use on-demand as a fallback if some consumers are resistant to subscription or whatever it might be. And then in terms of your second part of your question, Mike?

Yes. Just how do you see that maybe affecting growth? And as a follow-up to that, is your customer who maybe was going to pick an on-demand product, can you direct them into subscriptions? How does that work? How will you be successful there?

Yes. We basically pick and choose what we want to present to each individual consumer. And then in terms of growth, I think GMV growth is lower if you go to the subscription route. But if you think about pushing more into stronger lifetime values, maybe not upcoming -- it's hard to say about the next quarter, but the next quarters, we should see better growth on revenue and income. That's the main point of that decision is because the lifetime value differences multiplied by the conversion differences tell us the better story is to go into subscription.

Got it. Then maybe just one more. Can you talk a little bit about take rate trends? And then the 3.1% credit losses was maybe a little bit higher by deemphasizing on demand, will that naturally drop a little bit more?

Well, the take rate trends, I think we really shoot for like the 60% gross margin that we talked about in the past. And so when we think about the take rate, it's take rate minus our COGS getting us to 60%. And that's also how we sort of do the planning around our PLR plans for the year. And so the 3.1% PLR for the third quarter, basically right in line with what we're expecting. If some of the people on the call remember, people have followed us for a while, back in May, we talked about rest of the year, think about a 2.5% to 3% PLR for the entire year. And we already posted some lower PLRs lower than that range, which means, of course, we expect some of the third quarter, fourth quarter to be above that range because then you blend out to within the range. We did just update the guidance to tighten it a bit, so investors would know that we're looking -- it looks like it's being more in the bottom end of the range, the 2.5% to 2.75% for the overall year. So the 3.1%, I'd say, basically fits right into what we were expecting. And then on-demand, you do bring in more because the conversion is slightly better into on-demand, and I say slightly, but it does mean you bring in more new consumers into those products. And then more new consumers tends to lead to a higher PLR, less new consumers leads to generally a lower PLR because new consumers have higher PLRs in general. So I'd say that would be the only thing to call out there, Mike.

Our next question comes from Hal Goetsch with B. Riley Securities.

Charlie, great detail. I just wanted to ask a big picture strategy on what you're seeing, what your thoughts are on BNPL broadly in the United States. I mean PayPal talked about it quite a bit and -- on the last call more than ever. And I was struck to see how actually small it is, how fast growing it is for all the different players in the space. And they called out as a replacement for -- they're seen as a major trend in the replacement of credit cards. It's more user-friendly. Could you tell us how big you think the market is for pure-play BNPL is right now in the United States? How fast do you think it's growing and why you think it has many, many years to go?

Yes. I don't have an exact number for you, Hal, but I just go by -- I think the trend is going to be here for years upon years. If you look at credit cards, they were launched in the 1950s and how long does that trend last? People are writing the credit card trend for some time. I'm not going to say that we're going to have a 75-year BNPL trend. But I think that it's pretty obvious that a lot of consumers out there prefer to use BNPL over a credit card. And in some places, it also takes a little bit away from debit card. It doesn't really take away from debit card, I guess, in the end because people are paying us back with debit in the vast majority of cases, but it replaces like the full purchase of a debit card user as well. But what I think -- I think customers aren't stupid. They look at the total cost of ownership of a product. And I think they also look at BNPL as a safer product for them. I almost feel like some of these customers view us as like -- they really do view us as a budgeting tool, but almost like we're their nanny, like watching over them, not allowing them to overspend where credit cards allow people to overspend. No one in a credit card company would ever say it probably, but that's the win when someone overspend because now you've got a revolver. For us, when people overspend a lot, we're worried. We're worried that we allowed them to overextend and now they're not going to be able to catch up, we might lose the customer. So we're always trying to allocate spend to the customer in a way that is in total alignment with responsible spending. And then I think that overall lowers the cost of ownership of that credit product for the customer. It also dramatically reduces the risk of a bank personal bankruptcy, which is how do you even put a price on that. So I think a lot of the customers are probably shying away over time from migrating into a credit card because they just feel a lot safer and more comfortable with our credit product.

Can I ask one follow-up? Toward the end of your press release on initiatives update, you talked about some of the products you've been building for shoppers to increase engagement and monthly active users grew 38% year-over-year, revenue-generating users rose 120% year-over-year and monthly sessions climbed 78% year-over-year. I think it's the new KPIs. I mean, what you could comment on that? And what -- tell us what you built and why it's contributing to some of those growth figures that you demonstrated in the press release?

Yes. So we talked about the shopping as being a big initiative for us for 2025 and 2026. It will be probably a 2-year initiative to keep on rolling out these shopping features and these initiatives. I said the earn tab is kind of in that mix, although maybe not directly a shopping feature. What we're trying to do is trying to keep -- drive and create value for our customers. I think middle of America, mid- to low income, younger consumers, maybe new families. We want to drive value through giving them couponing, giving them discounting, price comparison, the ability to earn almost like gig economy type earnings. Not massive type job numbers, but on the fringe helps. And what we're -- the reason -- what we're seeing from doing all of that, which you pointed out, Hal, is we're seeing increased activity in the apps. And our view is that's just a big win. So we're monitoring those KPIs closely because the viewpoint is if you get the customer coming back in the app and returning and returning and returning over and over again, you're also going to increase retention and also give yourself a chance to introduce that customer to a subscription product. At some point, maybe they're here in early November, they're not interested. They open the app back up later in November. Okay, let me sign up for anywhere and now they're in. And that's really done by creating value, adding value, presenting that value in the app and getting that customer to keep on coming back.

The next question comes from Rayna Kumar with Oppenheimer.

It was really helpful to get the preliminary '26 EPS guidance. Could you just talk about some of the underlying drivers of that target, maybe revenue growth, GMV growth and your expectations for provisioning?

Yes. We don't have the callouts for the underlying numbers on it. But I'll tell you the overall theme is we do believe that we're going to continue to see continued growth in our subscription and our MODS, but probably leaning more towards subscription into 2026. We're going to be cost conscious as always. And if people have followed us for some time, you know that we really think quite a bit about growing gross margin dollars at a much faster pace than growing our operational expenses. So that's a part of that. The guidance we gave for the entire year 2025, the 2.5% to 3%, we're basically kind of thinking in the same ballpark there. Like we like that ballpark because of our top line. The top line numbers that were our take rate kind of really sits along the lines of maintaining the PLR kind of thoughts that we've had from 2025. And then if there's any maybe conservatism in there at all, it's just the economy. We're not seeing anything with our consumer, but we're watching it closely. Obviously, we have the government shutdown. I don't think it's going to continue into 2026. But I think if there's a bit of conservatism, it's based on the economy and what might happen.

Understood. And then just as a follow-up, can you comment on just what you're seeing out there in terms of competition? Are you seeing any changes in pricing or strategy from your competitors?

Not really. I haven't noticed anything major. I think we saw Klarna launch a subscription product as well, but it's like a much higher dollar subscription product. So that was like one of the companies kind of leaning our direction in terms of product offerings. But other than that, it seems like more of the same.

The next question comes from Hoang Nguyen with TD Cowen.

Maybe a quick one for Charlie. So since you are pivoting back to subscriptions now, maybe can you talk about maybe the difference this time in terms of marketing posture versus, I guess, the last time before you launched on-demand? How is this time different from the last? And I think last time, I think you were tracking a net adds on subscription, maybe you made 60,000 to 70,000 a quarter. I mean, should we expect you guys to get back to that level going forward? And maybe in terms of pricing, I noticed that you recently took pricing actions on new subscribers. So I mean, can you talk a little bit about that as a lever in terms of top line going forward?

Yes. I'll probably avoid the guidance on how many adds to subscription quarter-by-quarter, but we did increase pricing on both the subscription products just by $1 or $2 per month, really viewed as just an inflationary type increase. If you launch the products 3 years ago or so and there's been some inflation in the United States. So that's the main reason for those changes. And then I guess the start of your question, can you repeat it again, just to make sure I got it nailed.

In terms of marketing for the subscription.

Marketing.

Yes. Is it different this time versus last time, maybe a year ago before you launched on-demand?

Yes. To give investors a view of like how we market the product. So when we are leaning into on-demand, it is a more seamless like first step into a purchase because basically, let's say, you want to check out at Lowe's or somewhere -- one of the apps or one of the merchants in our app or you're shopping out there. We would not bring up a subscription in most cases, like the option to sign up for a subscription right away to the consumer. We would basically just bring up a purchase request like in the lending lingo, TILA , Truth in Lending Approval or purchase request is what we call it internally. We bring up a purchase request, which it would show the on-demand fee. The customer would just accept it, they get the on-demand fee and then they make the purchase. Now basically the difference in the marketing. And then the landing page, a lot of the landing pages, a lot of things we're doing towards advertising. It's all about bringing that funnel. But once they get into the funnel into the app, that's what the customer would see is basically they go right into a purchase request. Now what the most customers are seeing is if you want to go and use our product at point of sale or if you want to shop at one of the many merchants in our app, what we're bringing up now is the option to join our subscription. And so that's basically the biggest difference. So marketing-wise, it's just the funnel is driving them into a different choice. And like I mentioned, there is a slighter decrease in conversion into subscription. But based on what we've seen from conversion at point of sale into subscription and then conversion from on-demand users into subscription, we viewed it as a much better decision from a lifetime value standpoint to just go straight to offering subscription to many of these customers.

Got it. And I didn't see the chart on approval rates on the presentation this quarter. Maybe can you talk a little bit about that, whether you have -- there has been any change in terms of your underwriting this quarter?

No. I mean, we've always been -- we are launching new models. So we did launch new models this quarter. And those -- the point of those models, what we like to do is we like to keep approval rates at the same level and reduce PLR. That's usually what our goals are with our new models. So I think approval rates are probably around the same levels as we've presented in the past. But with the new models in place, we believe we should have lower PLRs for those new customers coming in.

This concludes our question-and-answer session. I would like to turn the conference back over to Charlie Youakim for any closing remarks. Please go ahead.

Thank you. And as people know, I like to usually give a Buffett or a Munger quote or story, but I've got one here from Buffett. It starts when he was just 10 years old. He scraped together $114.75, all the money he had and he bought 3 shares of Citi's Surface preferred at $38 a share. At first, the stock dropped to $27. And like a nervous young investor, he starts sweating. Then it crawls back up to $40, so he sells. He's relieved, he even makes a few bucks. But here's the kicker. A little later, that same stock shoots up past $200. Buffett said, if I just held on, I would have made a lot more money. That he says was his first real lesson in patience. Here's another data point from the Buffett -- from Buffett that also speaks to the power of patience. I think this crazy stat speaks for itself. Over 99% of Buffett's wealth came after his 50th birthday. That's the quiet miracle of compounding. It's not flashy, it's not fast, but it's relentless if you let it do the work. Buffett always says, my life has been a product of compound interest. And also, the stock market is a device for transferring money from the inpatient to the patient. So the real trick, start early, stay patient and let time, not emotion do the heavy lifting. Because in the end, wealth doesn't come from timing the market. It comes from time in the market. That's the $114 lesson. I'd like to thank everyone for joining the call today and also thank the Sezzle team for continuing to create wins for our consumers and for our investors. Thank you all. Have a good night.

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