FlexShopper, Inc. (FPAY) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to FlexShopper Q1 2021 Earnings conference call. I would now like to turn the conference over to Mr. Jeremy Hellman of the Equity Group. Please proceed, sir.
Jeremy Hellman: Thank you, operator. I would like to remind everyone that we have posted an updated investor presentation within the IR section of the company website, www.flexshopper.com and encourage everyone to review the forward-looking statement on Page 2 of the presentation. With that, I would like to turn the call over to FlexShopper's CEO, Rich House. Please go ahead, Rich.
Rich House: Thank you, Jeremy, and welcome, everyone, to our earnings call. Joining me today is our CFO, Russ Heiser. This morning, Russ will be expanding on the key financial aspects of our quarterly results, and I'll cover our operational highlights.
Russ Heiser: Thanks, Rich. I want to start with a reminder that we have posted an updated investor deck on our website. In that deck, we have several data points, including new and repeat lease volume by origination channel that are useful in monitoring our performance. In addition, we have broken out a number of operating and financial metrics by year so that the relationship between prior year originations and current year revenue and gross profit is evident. In our presentation, we've also included pre-marketing EBITDA, which we think provides another window into how our business is performing. Marketing expense is our primary growth lever and largest variable cost varies quite a bit during the year in response to both seasonal consumer activity, along with external factors. Therefore, removing it from the EBITDA calculation is informative when looking at the business over time, especially as marketing expense would be expected to continue to increase. The investor deck, together with our press release and 10-Q provide significant insight into our first quarter operating performance. As I have mentioned previously, there are two metrics which are highly predictive when it comes to forecasting revenue and gross profit for the ensuing year. The first is trailing 12-month originations since we recognize the lease revenue over the term of the lease. During the first quarter, our originations were up 21.5% on a dollar value basis. That was a function of both the lease count increasing by 8.7% year-over-year and average order value increasing to $532 from $475. The second predictive metric is lease merchandise, which represents the value of goods that have been leased by consumers, net of accumulated depreciation and any impairments. This is a good proxy for the size of the performing lease portfolio, and as such, is also highly correlated with forward 12-month revenue and gross profit. Our net lease merchandise balance at the end of the first quarter was $39.3 million, which is up 31.4% from the prior year. For those of you looking at the balance sequentially, it is normal to expect Q1 to fall somewhat from Q4 given the seasonality in our originations, which peak in the fourth quarter. As customers make payments on the leases originated in Q4, the net lease merchandise balance will go down. It is offset to a degree by new leases originated in the first quarter, but with Q1 originations below that of Q4, the net result is a dip in the net lease merchandise balance. However, that dip was accentuated by what was a significant increase in the percentage of early payoff transactions over what we have seen historically. We believe this is a byproduct of government stimulus.
Rich House: Thanks, Russ. By all accounts, the first quarter was a quiet one of steady execution. Our customers are generating good shape financially, so that's a positive for our credit quality. Our payment performance, as measured by cash received as a percentage of billed leases, was higher than any other quarterly period in 2019 and 2020. Even with the improved personal balance sheets, we are still seeing solid demand for our lease-to-own offerings as are our peers in the industry. I think that is primarily a function of the low weekly payment the customer enjoys with FlexShopper, which is more appealing than seeing several hundred dollars leave their bank account in one chunk. Before opening the call to your questions, I want to spend a moment discussing our retail partner or business-to-business, B2B business. Last quarter, we noted that a pilot program with a national retailer was set to expand from one state to four. That rollout, which occurred in March and April timeframe, has been successful, and we are now in over 300 storefronts with this partner. We continue to receive positive feedback from this retail partner and expect to expand our relationship to include additional states over the course of 2021. We're optimistic this partnership will accelerate our lease volume growth for the second half of 2021 and beyond. We are also busy working to secure additional B2B partners with a number of active discussions working their way towards pilot agreements. As COVID restrictions continue to be lifted, we expect these discussions to accelerate.
Operator: Thank you. One moment while we poll for our first question. Our first question comes from Scott Buck with H.C. Wainwright.
Scott Buck: I'm curious, can you tell us in absolute terms or maybe in percentage terms, the difference in early paydowns during the first quarter of this year versus the year ago period?
Russ Heiser: Sure. So we typically think of early payoffs accelerating in the first quarter of each year as we have tax refunds. But typically, that results in an early payoff percentage. That's about 13% to 14% of the portfolio. And this period was north of 16%. Great.
Scott Buck: That's really helpful, Russ. Second, could you help me understand who the incremental borrower is? With lease originations up 20%-plus year-over-year, I'm curious if -- you're reaching a number of new customers or customers are taking larger leases than they have in the past, a combination of both? I mean, what are the kind of moving pieces there?
Rich House: We believe there's two factors that are occurring. One is additional consumers that we're able to target via expanding our digital marketing channels. We've had a good success using technology that will enable us to go to different digital marketing channels that we were not using before. So we're finding some incremental customers to drive to our marketplace. Secondly, within our digital marketing place, flexshopper.com, we are using technology that is better able to target which consumer comes to see us and to focus a product offering that is most suitable for them. And that, we believe, is what's driving the increase in our average order value.
Scott Buck: Great. That's helpful. And last one, I'm just curious, what are the items that are actually driving demand? I think we've kind of clearly moved out a lot of the household stuff that drove lease demand in spring, summer of last year. So I mean what are the items now that people are most interested in?
Russ Heiser: Our mix, as we've talked about in the past, has been primarily consumer electronics. We still see consumer electronics as being the driving force in our lease originations.
Rich House: One of the -- Scott, to get more into detail with it on the average order value, we see consumers coming in to buy consumer electronics. That's our biggest opportunity right now. But we're also able to use our technology to kind of combine some products, if you will. So much like I'm sure many of you shop online, you'll see suggestions of what to buy in addition to what you're initially buying. And we've been able to incorporate some of that type of technology and suggests consumers other complementary products, and that's been successful for us.
Operator: One moment as we poll for more questions. There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.
Rich House: Well, we'd just like to thank you guys for joining us. And --
Operator: We do have a question come in queue. One moment. Let me just double check to make sure. We have a question come from Ed Woo from Ascendiant Capital.
Ed Woo: My question is, how do you see the shift towards online sales impacting your business? How do you guys manage to continue to grow that business, again, as you said, more consumers getting more comfortable to focus almost exclusively buying stuff online?
Rich House: Yes. We definitely believe that is a tailwind for us. We have a fairly substantial robust online marketplace. And as more consumers become comfortable purchasing online, that is definitely in our favor. And that's why we've been able to invest in expanding our digital marketing channels as the typical kind of Google search or Facebook advertising, we've gone to other channels as well as consumers are out there looking to shop online, and we see that as a positive tailwind for us. So our strategy, as we've talked about in previous calls, is we have our direct-to-consumer business, which we're growing at a very healthy rate, and we're trying to complement that by supporting not only our retail partners who have an in store presence, but we're also -- our sales team is focused on other retailers who would like to move into the digital arena, but may not have done that yet, and we can use some of our expertise that we've developed over time, marketing digitally to help them enter into the digital space using our expertise. And so we think that gives us, potentially moving forward, some type of competitive advantage as we compete with others in the retail space.
Operator: Once again, I'd like to turn the call back to management for closing comments.
Rich House: Well, once again, and thank you for joining us today. We'll look to speaking with you on the second quarter call and a few months.
Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
