Good day, and welcome to the Sezzle, Inc. Second Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Charlie Youakim. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Sezzle's 2024 second quarter earnings call. My name is Charlie Youakim. I'm the CEO and Executive Chairman of Sezzle. I'm joined today by our Chief Financial Officer, Karen Hartje; and our Head of Corp. Devon IR, Lee Brading. In conjunction with this conference call, we filed our earnings announcement with the SEC and have posted it along with our earnings presentation on our investor website on sezzle.com. If you have not already done so, please go to the Investor Relations section of our website. There, you will find the press release and our earnings presentation under quarterly earnings within the financial section. Now that we have all the administrative duties out of the way, let's get started. We're extremely excited to share our Q2 results and our updated guidance with you. Please flip ahead to Slide 3. Slide 3 provides an overview of how our actions are translating into positive results. As you can see, Q2 revenue rose 6.2% year-on-year, driven by strong growth in consumer purchase frequency and subscriber growth. Our growth is outpacing the buy now, pay later industry as reported by third-party research companies such as Adobe Analytics. Net income for the quarter came in at $29.7 million. Yes, $29.7 million for the quarter. But before anyone gets too excited, it includes a onetime discrete income tax benefit of $16.8 million for the release of the valuation allowance previously recorded against our deferred tax assets. This is effectively recognizing a deferred tax asset and pulling its impact forward. What that means for next year is that we'll be recognizing taxes at their full effect. So, adjusted net income for the quarter of $13.1 million, which is a number that we are still very proud of. As a result, we…

Thank you, Charlie, and hello to all. On to Slide 10. I'm excited to dive a little deeper into the results that Charlie provided earlier. Total revenue increased 60.2% year-over-year due to a 39% increase in UMS and 288% increase in subscription revenue as Sezzle Anywhere was launched in June 2023 end of the second quarter of 2023. Net income came in at $29.7 million for the quarter compared to $1.1 million in the previous year. As noted by Charlie at the start of the call, we recorded a discrete tax benefit of $16.8 million in the quarter related to our deferred tax valuation allowance. In the second quarter, we determined that our deferred tax assets are more likely than not to be realized due to the company's profitable trajectory and thus putting us in a taxable income position in the current and likely future years. To remove the discrete nature of the adjustment on net income, we have provided adjusted net income as a more reflective run rate of the company's results. Adjusted net income was $13.1 million compared to a loss of $0.2 million in the prior year. The improvement was driven by across-the-board performance with unit economics as total revenue less transaction-related costs grew to 57.6% of total revenue compared to 53.7% in the prior year and leveraging our non-transaction-related operating expenses as they declined to 32.9% of total revenue compared to 54.2% in the prior year. Those results are further reflected in our second quarter adjusted EBITDA margin of 32.9% compared to only 18.3% in the prior year. On Slide 11, you can see the second quarter revenue growth of 60% year-over-year is outpacing our UMS growth of 38.9%. Other than UMS, most of the growth is attributable to subscription, particularly Sezzle Anywhere. At the end…

[Operator Instructions] Our first question comes from Mike Grondahl with FNBO Northland. Please go ahead.

Hi Charlie, and team. Congratulations on a very strong quarter. My first question, subscriptions growing 91,000 sequentially to 462. Charlie, you mentioned, hey, you had some initiatives for first-time users. You're trying to expand the pool of current users and some ad spending. I don't know, just a few more details on each one of those might be helpful and kind of your outlook for subscriptions?

Yes, we're not providing any guidance on subscriptions, Mike. And then to the quarter-over-quarter results, we are putting a little bit more emphasis into marketing channels. Our view is, as we get stronger and stronger as a business financially, it just makes sense to keep on pushing the pedal on that side. I wouldn't say that we're like overly aggressive or jerky about it. We kind of like to have like a steady push or acceleration as we do that. So, I think that's helped a bit. But in terms of quarter-over-quarter and where this goes from here, it's just hard for us to tell because if you look at our total active users and the ratio between total subscribers to that number, at some point, you think there's got to be some sort of limiting function, right? We don't know the answer to where that might be. So, we keep on trying to grow and keep on accelerating and accelerating both groups, growing the active users, which is like the consists like a mini-TAM or an intermediate TAM for the subscriber count. So, I think that's where we're focused on both because we think at some point, there'll be some sort of limiting function between the two. Does that make sense?

Yes, directionally. And then just premium and anywhere, like the average is like $15 a month per subscriber, correct? That's the change?

Yes, that's the same.

Got it. And then any new merchants to call out just on your merchant relationships that are now live in the last quarter or two?

No, we would have announced something publicly if we had a significant merchant. I will not say that our team is growing the pipeline. That's one thing we're watching closely. And, as we mentioned in the call here, some of the launches that we have in the pipeline are actually tied in some ways to the bank partnerships. So, the bank partnership helps us launch more merchants through our on-demand product. Those are generally some merchants that have lower margins. They're looking for a product or more of the fees are passed on to the consumer. So, we have some of that kind of tied behind that launch of that product as well.

Got it. Your revenue as a percent of UMS was 10.5%, higher than where we modeled, and it looked like almost a record for you guys. How should we think about that number going forward? Is that sort of a nice tailwind pushing that higher? Or you're getting more efficient, you also have more subscriptions. How do you feel about that number?

Of course, I love it. And I want to keep on moving it north personally. But as a company, I think subscription helps us with that. But then we also have new products launching. And so, again, that's hard to project going forward where that might go. But our goal is really to keep on increasing top line, which helps us get higher gross margins. We mentioned we have gold, 60% plus gross margins as a company and getting that top line definitely helps with that. I think somewhere in this range going forward is probably a good place to start. But we do monitor that number. No doubt about it. But as we introduce new products, that's going to be the big question mark what those new products might do to that.

Got it. And then, last one for me. Adjusted net income, $13.1 million in 2Q. I think per that slide, $9.4 million in 1Q, so $22.5 million. Your $40 million of adjusted net income guidance would kind of imply $18.5 million in the back half of the year, if I'm thinking about it right. Is there something seasonally there we should be cognizant of? Or just kind of the step down there?

I think some of that is seasonal because fourth quarter comes along, it's definitely a higher volume quarter for us, but it's also a quarter -- I mean, this is why the buy now, pay later product, I think, is such a fantastic product for consumers. In that quarter, we try our best to make sure that consumers don't overspend, which on the flip side, I think credit cards love when consumers overspend because they build up balances and they start to evolve. We don't want consumers to overspend in that quarter because if they oversee tend to find is that leads to higher default and then higher default leads to lost consumers because with our product, once they aren't a default situation, they can't transact with us again. So, we play a lot of defenses, tend to have higher loss rates in the fourth quarter. And so, I think that's probably the biggest variable going forward, and we don't want to misguide anyone with the variability that can happen in the fourth quarter. I think that's really more about what we're guiding for.

Got it. Congratulations again. Thank you.

Thanks Mike.

This concludes our question-and-answer session. I would like to turn the conference back over to Charlie you came for any closing remarks.

Thank you. Thank you, operator. In closing, again, I'd like to thank the Sezzle team. I know on the outside, I think we look like a comm duct above water, but I can guarantee that below the services team's legs are moving extremely fast. And I think the work has been incredible through the past quarter and more than just the past quarter. And also, for your frequent listeners to the conference call since to those in Sezzle all know that I love Charlie Munger. Here's another Charlie Munger quote that's appropriate for the real Sezzle investors, i.e., the long-term holders. The big money is not in the buying and selling, but in the waiting. Thank you all, and have a great rest of your day.

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