FlexShopper, Inc. (FPAY) on Q3 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to the FlexShopper LLC Third Quarter 2021 Earnings Conference 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. Thank you, Jeremy. You may begin.
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 CEO, Rich House. Please go ahead, Rich.
Richard House, Jr.: Thanks Jeremy and welcome everyone to our earnings call. Joining me today is our CFO, Russ Heiser and as always Russ will be expanding on the key financial aspects for our quarterly results and I will cover our operational highlights. Additionally, Russ and I are both recovering from COVID so we will try to keep the raspy voices and coughing down as much as we can. So we apologize for that ahead of time. Our third quarter was solid with topline revenue growth with a nice increase in bottom line profitability. Our year-over-year revenue was up 25% and EBITDA was up by over 100%. Despite the headwinds of COVID in the third quarter we also continued to make progress in expanding our retail partner ecosystem. If COVID rates continued to wane, we are optimistic those retail partners will see their operations normalize and as that occurs we expect to see at least throughput increase accordingly. Throughout the pandemic, our direct-to-consumer FlexShopper.com website has proven a key asset and a driver of lease originations. As we noted last quarter, stimulus programs were dampening demand across the rent to own industry as subprime consumers were in better personal liquidity position that historically has been the case. That dynamic continued through the third quarter but has begun to diminish moving into fourth quarter. Our recent early payout activity has begun to revert to historical patterns and this should be favorable for our earnings moving forward. This is particularly positive behavioral change heading into the holiday shopping season which is traditionally our busiest quarter for originations. Turning back to our retailer relationships, we recently signed two additional partners who we began to roll out this month and we are excited to see how this relationships will drive growth for the fourth quarter and into 2022. Now I am going to turn over the call to Russ and let him discover -- discuss specific items regarding our financial performance.
H. Russell Heiser, Jr.: 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 that are useful in monitoring our performance. The investor deck together with our press release and 10-Q provide significant insight into our third quarter operating performance. Rich has mentioned our impressive revenue and EBITDA growth so I will dive into originations and gross margins. First at FlexShopper we've mentioned repeatedly that we're going to focus on asset quality. As a result we're only going to make underwriting decisions that pass the appropriate IRR hurdle. This has resulted in a decrease in originations in this quarter versus the same quarter last year. Those of you that follow our peers have heard the mention that this stimulus environment has not been ideal for lease to own demand. Whether this decrease is a result of our typical customer being presented with other liquidity options, we're having the personal liquidity that did not need our services or combination, we believe this is transitory. In 2020, the third quarter was the first period in which we resumed a more normal underwriting stance following our initial conservative reaction to the pandemic when we tightened the underwriting. Those of you that have followed us for some time will remember that there were some pent up demand, we had the really sharp increase in originations during that third quarter of 2020. Conversely the third quarter of this year continued to be impacted by stimulus and artificially suppressed demand for rent to own and other consumer finance options often utilized by non-prime consumers and resulted in an unfavorable comparison with originations down almost 30%. However, our year-to-date originations versus last year are still up. As we think about the end of the stimulus impacted consumer behavior we expect it to occur in phases. The first is the normalization of customers choosing the early payoff or same as cash option. For almost a year, customers have been choosing lower margin early payoff options at double the pre-stimulus rate. This quarter as Rich mentioned was a return to more normal take rates around our early payoff options and resulted in a bump in gross margin. Gross margin expanded to 41% compared to 36% in the same quarter last year. While our margins have historically had some variance due to seasonality and the average age of our portfolio at different times of year, the primary reason for this variance was less early payoffs. The second phase of this transition back to a more normal environment would be the return of customer demand. So far in the fourth quarter our originations are right on top of last year's numbers. However, as much as we would like to say that demand has returned to normal, with the holidays around the corner it is too early to draw a distinction between seasonality and a normalization of demand. Our net lease merchandise balance at the end of the third quarter was 33.3 million which was up 7.8% from 30.7 million the prior year. So despite all of the headwinds we've been able to grow the portfolio. Our largest variable cost is marketing expense. Marketing is responsible for our growth in new customers and overtime our repeat customers and we will continue to spend as much as we can at the appropriate acquisition cost. Marketing expense was 1.8 million in the third quarter which was a slight increase from the 1.7 million from the third quarter of 2020. For the trailing 12 months our average customer acquisition cost was $96 which was a level which we can still derive the appropriate returns on our capital. We were able to support this higher acquisition cost due to impressive gains in the customer's first order of value of almost 15% versus the same time last year. Pre-marketing EBITDA was 6.6 million in the third quarter compared to 3.8 million a year ago. Adjusted EBITDA more than doubled to 4.8 million compared to 2.1 million during the third quarter of 2020. With that I'll hand the call back over to Rich.
Richard House, Jr.: Thanks Russ. Overall we believe we had a solid quarter and fared well despite the headwinds we faced. In particular, I'm proud of the bottom line profitability we were able to report. Looking ahead to the fourth quarter, conditions in our industry appear on their way to normalizing and that bodes well for us entering the holiday shopping season. I do want to make one comment around product availability as we've seen others comment on supply chain issues. In our view much of these delays centered on larger items and wide goods like refrigerators or washing machines. These are minor product categories for us and our primary category is called consumer electronics and we're not seeing any delays. One of the attributes of our FlexShopper.com website is that we have a number of dropship box orders. So we get into our site looking for gaming console, you'll see options from several retailers. That diversity of supply means we should be well positioned to deliver whatever item a consumers looking for this holiday season. As I have said for some time since I've been here, we continue to emphasize our core priorities which are in this order; underwriting, liquidity, and distribution. In good times and bad those elements help us maximize our return on shareholder’s capital. However, I'd like to add to that comment. We have a discipline of managing all of our marketing investments based on the appropriate internal rate of return at the marginal score range, credit score range. Therefore, there will be periods where we invest more or less marketing dollars based on market conditions. In the previous two quarters of stimulus payments and COVID issues with our retail partners cost us to invest a little less in marketing than we would have preferred. Obviously that has resulted though in significant increasing profitability which points out the profitability of the assets that we are originating. As I mentioned earlier, even though we have continued our investment discipline, we have continued to grow the portfolio. Our goal is to invest as much as we can in the marketing dollars to grow the company as fast as possible. But we will never sacrifice the rate of return we expect on our investments. That includes -- that concludes our prepared remarks and we are happy to take any questions.
Operator: Thank you. . Our first question is from Scott Buck with H.C. Wainwright. Please proceed with your question.
Scott Buck: Hi, good morning guys. I am curious, do you have a dollar figure in terms of originations that did not occur because of the store closures in retail or even some kind of same store year-over-year stats that you can share with us?
Richard House, Jr.: Well same store would probably not be appropriate Scott because we started with the stores right, so the same store sales are much higher because we obviously restarted. So that would be -- we have had a huge increase in same store sales because we didn't have the retailer before. We don't have a dollar figure but I would say that it is probably in the order of because of COVID, I would say it is in the order of 20% less than we would have forecasted even in normal environment.
Scott Buck: Okay, that's really helpful Rich. And then Russ, can you help kind of walk us through or speak to the improvement in gross margin and kind of what the expectation there is going forward?
H. Russell Heiser, Jr.: Sure, so I mentioned a good amount of the increase from 36% to 41% was driven by the reduction early pay offs and we had made some underwriting decisions when we -- you had the increased early payoffs. At the end of the day as Rich mentioned we want to originate at the appropriate IRR as many customers as possible. So we have made some underwriting changes that will result in those gross margins returning to the high 30s going forward and we should think about that as the long range number.
Scott Buck: Okay, that's perfect. And then the year-over-year decline in originations is that driven by any particular product group or subsect or is it pretty kind of broad across the offering?
Richard House, Jr.: It is pretty broad. I think that, what we look at is we have a model that we use, our internal rate of return which includes the cost to acquire accounts. And in the payer behavior we haven't seen a substantial change in payer behavior because we are pretty disciplined on that. Some of the cost to acquire accounts was higher this year than it was last year because I think a lot of people had pulled out of the market last year online. So we just have to have the right discipline to do that but it's across all categories. But as Russ I think mentioned in his commentary, we're beginning to see that demand pick up again in the fourth quarter and we are investing in the program.
Scott Buck: Okay, that's great. And then last one for me on marketing spend in the fourth quarter, should we expect a similar step up from the third quarter as last year in terms of kind of absolute dollar terms or just being a COVID year last year and maybe a little less so this year changed that?
Richard House, Jr.: No, we're essentially seeing -- as I mentioned we're seeing originations right on top of last year, we're seeing marketing spends really similar to what we saw in the fourth quarter last year so far. So as demand picks up, expect the same type of spend.
Scott Buck: Okay, perfect guys. Appreciate your time and hope everybody is doing a bit better.
Richard House, Jr.: Well, we're getting better, we just don't sound good so.
Operator: Thank you. Our next question comes from Ed Woo with Ascendiant Capital. Please proceed with your question.
Ed Woo: Yeah, I also hope you guys get a speedy recovery, both of you guys. My question is on competition, have you guys seen a significant increase in I guess lease to own or some of the buy now, pay later crowd payment type of -- that have been recently entering the market?
Richard House, Jr.: No, I think that the mine out -- I mean just to better frame this out, the buy now pay later crowd which is obviously growing very rapidly and has certainly been a favorite of the market, operates a little bit higher and in a better spectrum than we do. So they're really not competitors with us so to speak. I think where the competition has increased is four people have been investing online, in online marketing which includes credit card companies and other providers of liquidity such as installment loan lenders. So yeah, there's more competition in the online market than there was last year. But we're not directly competitive with someone like a firm or client because they are a lot higher.
Ed Woo: Great. And then my question is on the supply chain. I know that there's been a lot of discussions about it, some of these retailers are saying that they don't have all the products for this holiday season. How bad is it and do you think is going to get corrected in early 2022?
Richard House, Jr.: We've been fortunate as I said in my prepared comments and that in the electronics area it has not been bad. In fact, we had a -- recently we had a special promotional with one of our main providers to install game stations and that worked out very well. We have enough electronics and wires that they generally have one of the things that are needed. We're not big in washing machines, the refrigerators, etcetera and I think that's my understanding is that's where most of the supply chain issues are. So we just haven't seen it causing a problem for us. I'm not saying -- I know it exists but it's not causing a problem for our particular business.
Ed Woo: Great, and then just one last question, inflation is data -- does that impact your business at all?
Richard House, Jr.: Theoretically inflation would be I suppose helpful right. I mean because the prices will go up and we mark our prices, right. That's what we do. At some point then it would get too high I suppose where you would get into an affordability issue. But you can always combat that with the appropriate underwriting. So I'm not too worried about inflation with respect to our business at this point in time. I think it will get into like a serious inflation mode and then we would all have to think about that. But where we are at this point in time it may be more favorable than less favorable but I think it's probably neutral.
Ed Woo: Alright, great. Well thank you. I hope you guys recover.
Richard House, Jr.: I'm -- we're getting better, we just don’t sound good.
Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to Rich House for closing comments.
Richard House, Jr.: We appreciate all you guys participating on the call and we will talk to you next quarter. Thanks.
Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
