FlexShopper, Inc. (FPAY) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to the FlexShopper LLC Second quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jeremy Hellman of the Equity Group. Thank you, Jeremy. You may begin.
Jeremy Hellman: Thank you, operator. I'd like to remind everyone that we have posted and updated investor presentation within the IRS section of the company website, www.flexshopper.com and encourage everyone to review the forward-looking statement on page two of the presentation. With that, I would like to turn the call over to FlexShopper 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. As always, Russ will be expanding on the key financial aspects of our quarterly results and I'll cover our operational highlights. Our second quarter was one of steady growth in both our distribution channels. Overall, we had solid origination growth and also made solid progress in expanding our retail partner ecosystem. Starting with our direct to consumer flexshopper.com website, we continue to invest in digital marketing programs as those are yielding customers at or below the necessary customer acquisition costs for us to achieve our return on capital hurdles. As we and many of our peers have noted, government stimulus programs have had and continue to have an impact on our customers. Historically, subprime shoppers behave differently during tax return season when many receive a relatively sizeable amount of cash relative to their typical budget. This often in the past resulted in a bump in early lease payoffs, and same as cash transactions. Pandemic-driven stimulus programs had a similar impact and we are paying close attention to how the new child tax credit payments affect our customers and their shopping behavior. Overall, we see two early takeaways. First, there does appear to be some dampening of demand as customers choose to use those payments to purchase merchandise outright, that they may have otherwise previously paid for over a longer period of time. Secondly, and favorably, we're also seeing some reduction in delinquencies. Turning to our retail relationships we're pleased to report that our pilot program with a national diversified merchandise seller is more than double the number of storefronts prior to the holiday season. We expect to add one state with our partner, but that state accounts for an outsized portion of their stores. In our view, this is a strong Testament to the value we bring to them. We also kicked off a four state pilot with another national diversified retailer and expect to run that test through the end of the year. In both cases, the timing of our rollouts has been slightly impacted due to some degree by the recent COVID-19 resurgence rates. At this time, we remain cautiously optimistic that states will not be returning to the same shelter in place with restrictions we saw in 2020. I'm now going to turn the call over to Russ to address specific items regarding our financial performance and corporate liquidity.
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 a number of data points, including new and repeat lease volume by origination channel that are useful in monitoring our performance. In addition, we've broken out a number of operating financial metrics by year. I also want to remind everyone about a relatively new datapoint pre-marketing EBITDA, which provides additional insight into how our business is performing. Marketing expenses, our primary growth lever and largest variable cost varies quite a bit during the year and responsible seasonal consumer activity along with external factors. Therefore moving 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 second quarter operating performance. During the second quarter, our portfolio originations were up 29.9%. That was a function of both the lease count increasing by 13.5% year-over-year and average order value increasing to $516 from $452 or 14%. As I mentioned previously, current period originations are highly predictive when it comes to forecasting revenues over the ensuing year, since we recognize the lease revenue over the term of the lease. As a reminder, the leased merchandise figure represents merchandise that has been leased by consumers, net of accumulated depreciation and any impairments. This is a good proxy of the size of the performing lease portfolio and as such is also highly correlated with for 12 months revenue and gross profit. Our net lease merchandise balance as of the end of the second quarter was $37.6 million, which is up 44.3% from $26.1 million the prior year. Second quarter gross profit margin was 36% compared to 30% in the prior year. There are a number of items that play into that improvement, but the relative decrease in payments delinquencies is the most impactful. Our largest variable cost is marketing expense. Marketing is responsible for our growth in new customers and over time, our repeat customers, and we will continue to spend as much as we can at the appropriate acquisition costs. Marketing expense was $1.9 million in the second quarter, which is a significant increase versus the $0.9 million from the second quarter of 2020. For the quarter, our average customer acquisition cost was $102, which is higher than we've seen in the past and is that the level of which we derive appropriate returns on our capital. Pre-marketing EBITDA was approximately $4 million this quarter versus the $2.9 million in the second quarter of 2020. And the company continues to grow. EBITDA was $2.1 million for the second quarter, compared to $2 million in the second quarter of 2020. Net income which $0.9 million resulted in resulting in diluted earnings per share of $0.01. With that, I'll hand the call back to Rich.
Rich House: Thanks Russ. Unlike to all of you listening, I'm sure we would like see this pandemic in the rear view mirror. Unfortunately, that is not yet the case. However, and as our Q2 results demonstrate, we've learned how to adapt to this environment. We've been able to continue to grow our business at a very strong rate despite the effects of the pandemic and the associated stimulus payments. This is highlighted by the strong year over year growth in net lease inventory, Russ outlined a couple of moments ago. Another strategic initiative I want to comment on is our push to develop co-branded retail websites with retail partners. This initiative can be divided into two categories. The first category is co-branded fries with a partner who has a digital presence, but they require marketing expertise to maximize the sales volume associated with financially underserved customers. We have launched our first co-branded site with that retail partner this quarter and we were pleased with the early results. The second category is focused on assisting our traditional retail partners who may not have a robust digital presence. We have extensive online and retail expertise home from our direct consumer marketing through our operating flexshopper.com and we can leverage that experience to provide a fully operational retail website, which includes leased own financing. By leveraging that experience we're able to enable retail partners another way to reach their customers and increase sales. Coupled with our rent to own option being made available at checkout, look in store and online, we really feel we have a win-win proposition for everyone. We're actively working with our retail partners in the second category to create a co-branded solution. In conclusion, I want to emphasize our corporate strategy, which is to maximize the growth of the company while maintaining the appropriate return on capital. We are continuing to plough as much of the cash we collect as possible back into marketing to continue to grow our business to consumer channel through flexshopper.com. All that depresses EBITDA in the short term, it provides the best path to long-term success for the company and shareholders based on the returns on invested capital We enjoy over time in this line of work. Additionally, we're constantly looking to expand our business with retail partners and we have invested in increasing the size of our sales team. Although these sales and marketing investments depress EBITDA in the short term, it is comforting that our EBITDA grew over the second quarter of 2020 while we still made these investments and these investments provide a platform for long-term financial success. As always, we continue to emphasize our core priorities, which are underwriting, liquidity and distribution. In good times and bad, those elements enable us to maximize our return on shareholder's capital. That concludes our prepared remarks. And we're happy to take any questions.
Operator: Thank you. We'll now be conducting a question and answer session. Thank you. Our first question comes from Scott Buck with H.C. Wainwright. Please proceed with your question.
Scott Buck: Hi, good morning guys. Can you give us a little bit more color on the new pilot program that's set to launch here this month? Is it a business similar to some of the other B2B that you have, or is it a new thing? How much education is required etcetera?
Rich House: It's a similar program to the one we most recently launched and we're going to be able to leverage some of the investments we've made in sales and sales support to support both most retail partners and there's significant overlap in the expertise required to do that.
Scott Buck: Can you talk about what region of the country?
Rich House: We're primarily in the Southeast and Texas.
Scott Buck: Okay, perfect. Thanks. And then Russ on the increased marketing spend, how do you guys weigh the increase marketing versus EBITDA? It sound like you're throwing everything in everything you have at this point in the marketing, but how long does last and when do you expect to see kind of a slowing of the acceleration in any provision in volume from that increased marketing expense?
Russ Heiser: Right. Of course, as we've mentioned in the past, as long as we're able to acquire customers with the right -- new customers at the right acquisition cost and when you continue to put dollars into that channel, as Rich touched on, there's been some decreased as a result of additional stimulus dollars in the market, especially in our consumer's hand. So I think we have a pretty good runway to continue to spend on marketing like some point I suspect in the next 18 months to 24 months, we'll start seeing that growth, sustainable growth start to weigh.
Scott Buck: Okay, perfect. And last one for me you kind of touched on it there a little bit. But, we're kind of in the back of school period now. I'm curious whether or not the at-home schooling that a lot of us dealt with last year has resulted in a less demand for some of the computers or that kind of related electronics here in July and August?
Russ Heiser: What we're seeing on the demand side, we're not seeing a lower demand for purchases. We're seeing a lower demand for extended leases if you will. Right? So we continue to get a nice sales volume but people who would normally maybe pay us off over several months, 12 months or a extended period of time, tend to be paying earlier. So when we talk about demand, there's really not a demand at the retail level as much as there's a demand for the extended period of a non-prime liquidity solution.
Scott Buck: Right. Okay. That makes sense. Okay.
Rich House: And talk to some of my trends and talking to some of my friends in the industry, both in Emily, Sean as well as in credit card business I think many of us are repeating the same phenomenon, which we all -- we don't know for sure what's happening, but we all are attributing that to an unprecedented level of government femaleness.
Scott Buck: I appreciate the extra color. Thank you.
Operator: Thank you. Our next question comes from Michael Diana with Maxim Group. Please proceed with your question.
Michael Diana: I know in the press release, half of the originations from existing customers. How do you see that going forward?
Rich House: I think that over time as our customer base continues to grow and some of the opportunities to acquire new customers at the appropriate acquisition costs slows down, we'll see that number continue to grow over time.
Russ Heiser: And that's favorable for us as we've talked about in the past, the margins associated with repeat customers are more favorable because we don't have to spend money to acquire that customer. And they've already demonstrated ability and willingness to pay us. And so the nature of this business is where we're at right now as a strategy. What I was trying to allude to in my prepared comments is we'll continue to invest as much as we can right now to build a big customer book, knowing that that will manifest itself in an excellent customer return business and continue to support high margin efforts for us every move forward.
Operator: Thank you. Our next question comes from Ed Woo from Ascendiant Capital. Please proceed with your question.
Ed Woo: Have you seen any shortages in terms of inventory at some of your retail partners?
Rich House: With some of our retail partners the nature of their business is that if they've had some inventory issues which has affected their aggregate demand, the aggregate demand for our financing. So that is a real advantage out there.
Ed Woo: What is your outlook for the holiday season? Things going to get worse, do you think it's going to, pamper your results because of the fact that the consumers don't have as much product out there to buy, or do you think by that time, things will use up a little bit?
Rich House: I will put that into two categories if you don't mind. On our flexshopper.com, which is direct to consumer, I doubt if we'll have any inventory issues whatsoever. We have not had any indication from our major retail partners that they have -- that they have inventory issues. So I don't expect that'll be a problem. There's -- on some of our retail partners which like fire partners, I don't expect any problems there. Some of our newer partners is really going to depend on to some extent on COVID and how busy their stores will be and that will also impact inventory. So it's very difficult to project how those retail partners will do in the holiday period. But as we sit here today, most of our business -- much of our business is based through our direct to consumer. And we have no indication from any of retailers that they're having any inventory problems.
Ed Woo: Great. And then my last question is you mentioned that stimulus has increased people's ability to buy it with cash, but in certain regions were similar federal unemployment assistance, have you seen in areas where it's part, have you seen that increase to more demand for your leasing products?
Rich House: Not, not yet. We have not -- once again, we've seen, continue to see a fair amount of activity, so they just tend to be paying them off earlier than they had in the past. I suppose over time we would expect -- one would expect that as these stimulus packages run out that would mode move back to the norm. Right. I guess generally things will regress to the mean over time. We just don't know how all that will do. And that's why I mentioned in the prepared comments that since we've never seen this before, it's unclear to us how this trial here tax credit will impact things, but we're continuing to monitor it. We just haven't seen any dramatic shifts yet, but it's something we look at all the time.
Ed Woo: Great. Well, thank you for answering my question.
Operator: There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.
Rich House: Very fine. Well thank you for joining us today. We look forward to speaking with each of you again on our third quarter earnings call. Thanks again.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.
