Good day, and welcome to the Sezzle Incorporated Third Quarter Financial Results Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Now I’d now like to turn the conference over to Mr. Charlie Youakim, CEO and Executive Chairman. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to Sezzle’s 2024 third 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; our President, Paul Paradis; and our Head of Corp Dev and IR, Lee Brading. In conjunction with this conference call, we filed our earnings announcement with the SEC and posted it, along with our earnings presentation, on our investor website at sezzle.com. If you have not done so already, please go to the Investor Relations section of our website. There, you will find the press release and earnings presentation under Quarterly Earnings within the Financials section. With that done, let’s get started. I’m very excited to share our latest quarterly performance. Our strong growth momentum continues to show in our financial results as we set new highs in several areas. The combination of stronger-than-anticipated results, plus the launch of a banking program with WebBank, has led us to raise our 2024 guidance. Many of these items are captured in our summary provided on Slide 3, if you want to flip ahead. The first item to pop out on that slide is that our quarter three revenue rose 71.3% year-over-year. Like Q2, our strong performance was driven by the rise in consumer purchase frequency and the growing number of subscribers. Our subscriber count reached 529,000 at the end of the third quarter, which represents an increase of 67,000 subscribers when compared to last quarter. Clearly, we are 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 $15.4 million, representing a net income margin of 22.1%. Like Q2, we have some one-time discrete tax items to adjust to that…

Thank you, Charlie, and hello to all. On to Slide 12. I’m happy to go into greater detail on our quarterly results. It’s always fun when the results are this strong. Total revenue increased 71.3% year-over-year due to a 41% increase in UMS and a 167% rise in subscription revenue. We have provided adjusted numbers to remove the noise mostly related to the discrete nature of our deferred tax valuation allowance, which is nonrecurring. We believe this provides a more reflective run rate of the company’s results. Adjusted net income was $17.3 million for Q3 compared to $1.2 million in the prior year. The significant gains to the bottom line were driven by all facets, from revenue growth, which was up 71.3% year-over-year; to unit economic gains as total revenue less transaction-related costs rose to 55% of total revenue compared to 49.2% in the prior year; and to leveraging our non-transaction operating expenses, which fell to 30% of total revenue compared to 46.2% a year ago. These results are further captured in our EBITDA margin, which rose to 32.2% compared to 18.5% a year ago. On Slide 13, you can see the third quarter revenue growth of 71% year-over-year is outpacing our UMS growth of 40.6%. Most of the additional revenue growth beyond UMS is attributable to subscription, particularly Sezzle Anywhere. At the end of third quarter of 2024, we had 529,000 subscribers compared to only 210,000 in the previous year. We didn’t launch Anywhere until June of 2023, thus, a lot of UMS and subscriber growth occurred subsequently. We have our bundled transaction-related costs on to Slide 14. Transaction expense, which is primarily payment processing costs, declined to 1.9% of UMS. We believe we can maintain a level of around 2%. Net interest expense continues to hover around 0.5%…

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] First question will be from Mike Grondahl of Northland Securities. Please go ahead.

Hey, thanks guys. Could you talk a little bit about what you’ve learned so far with the bank partner and how the new On-Demand product is going?

Sure. I think the first thing with the launch of the partnership, I think a lot of what we expected to happen has happened.

The second part is on competitive environment.

Okay. But back to WebBank, I think what’s happening is what we’ve really expected. It’s really simplified the business and helped us to focus on the unified product construct, and that is helping profitability. It’s helping profitability because it simplifies the business. But also in a number of states, in the state-by-state approach, we are quite limited. And now with a national approach, we are seeing some pickup in our revenue and our profitability in some states across the U.S. And Mike, just that’s provided or that kind of like impact is provided in the guidance. It’s in there, I guess. And then as far as On-Demand, we mentioned 30% increase in activations. So we’re presenting On-Demand along with subscription to consumers as they enter our app, et cetera. And we are seeing increased pickup, which is what we expected. I think when a customer comes into the app, we kind of understood that for some customers, it might be a bridge too far. You use this once like a freemium model with a merchant checkout, and then you come to the app, "I’d love to check out Sezzle," and use us in more places. And then we’re asking you for $12.95 or $17.95 per month and a commitment of some kind. And I think that created some restrictions in some people’s thoughts. With On-Demand, it basically reduces the friction to the entry. And so that’s helping with the activations. And then part two, what was it again, Mike, part two?

Well, it was the On-Demand stuff. Maybe just one follow-up, Charlie. Any update on the bank products you want to offer? Is that mid-2025? What’s the current thinking there?

Well, I think we have these two pillars basically in the company of what we want to keep on focusing on because we think that consumers kind of view us this way. We have a financial benefit or a financial tooling benefit to consumers, but we also have a shopping benefit to consumers. And I always kind of think of analogies, and I think of the company as like we’re an athlete trying to be as agile as possible. And we just kind of like leaned into our left foot with financial services, getting On-Demand launched, getting the WebBank partnership. I think we’re probably going to push back over to the right foot, to the shopping side, and really try to create some incredible shopping features in the app. Because we know that those shopping features can attract new consumers, can make the product stickier, can just overall enhance the value creation to the consumer. So I think in the near term, we’ll be really focusing on those shopping features. I think that being said, we’re not going to totally ignore the other side. We’re not going to ignore financial services additions or financial products. But I would say probably no commitment on the time line. I’m sure we’ll have one or two products potentially on the financial services side that we’d launch in 2025. But the near term is really to focus more on the shopping side.

Fair. And you guys said that 90 days ago, too. So that makes a ton of sense. And congrats again on the robust quarter and guidance.

Thanks a lot, Mike.

Thank you. Next question will be from Nico Sacchetti from RBC. Please go ahead, sir.

Hey everyone. Congrats on a good quarter. Can you hear me?

Yes. Thanks. We appreciate it.

Can you just clarify, so the full year 2024 guide, is this a GAAP number, $12.05, and your adjusted number is $9.80? Is that adjustment from the cost around launching the banking program?

No, the adjustment is around the discrete tax items. I don’t know, Karen, do you want to provide any more details on that?

We had a valuation allowance against our deferred tax asset, which we released given where we’re going with profitability, and that created in second quarter a huge discrete tax item that we still have on our books. And so we back that out and some other smaller one-time items to come up with an adjusted number that is more meaningful to investors.

Okay. And then it’s $12 in adjusted earnings guidance for the upcoming fiscal year?

Exactly. Exactly. And that would be more apples-to-apples, that’s more in comparison to the $9-plus number in 2024.

Got it. Okay. I mean you’re growing at such an incredible clip. I’m just curious, from what you guys are seeing, where do we go from here? I know you like the basketball analogy, but maybe what inning do you think we’re in? What’s the outlook from here? I mean we’re looking at, what, 20% net income margin, 30% EBITDA margins and now 55% revenue growth. What do you think is the goal from a growth standpoint? And what’s the opportunity ahead look like?

I think we really think about it more in terms of we’ve got this great sector we’re in, buy now pay later. I think the estimates out there is that buy now pay later itself is going to grow 20% year-on-year as a whole. And our view is that we’re outperforming the entire sector. We had 71% revenue growth year-on-year in the third quarter. And so the way I kind of always view it and our team is viewing it is the sector is going to grow. A lot of our competitors are going to do really well. But as we’re doing that, our strategies and our approach, we believe that we’re going to be able to kind of push our shoulders out and gain market share in the sector that’s also growing. So that’s basically what our approach has been. We’ve kind of always looked to Australia as the canary in the coal mine for the sector, and they’ve had growth above and beyond what you’ve seen in the U.S. so far because they launched it there a couple of years earlier. So we definitely believe that there’s growth to be had in the sector. And then our goal is to just spread and increase our market share within the sector as we’re doing that, just through really strong strategies.

Is there anything you can attribute to, like is there some secret sauce in here or just more of what we’ve discussed around not chasing growth at any cost but more of this quality growth approach?

Well, definitely I think – we definitely have the quality growth approach and not seeking growth at any cost. We think long term. We think like in five-year views. So we’re willing to make decisions that fit that. And I know that people – a lot of people out there doubt this kind of like competitive advantage, but I think our team is incredibly awesome. I think that we have very high standards in hiring. We have very high standards in performance management. And great talent attracts more great talent. And I think that if you look at our history, we’ve come up with a lot of strategic or product differentiations that have helped us, but those types of product differentiations are created by an excellent team. And so I think we’ve had incredible retention. We’ve got an incredible team. It’s allowed us to become this amazing athlete, in the analogy view, that just outperforms. And I think that my view and our view is that we’re going to keep on doing it because we have an incredible team that really understands how to cut the BS out of the game and go after real results, but also really hit it and win big for all the stakeholders along the way while we’re doing it.

Is there any tie to a weaker consumer that is maybe helping the business where it looks like people who are existing customers of yours are using it more frequently by quite a substantial rate above what you saw a year ago? Any idea what you can attribute that to? And maybe like do you have a reference point for what’s common in the industry for how often people are using these? And are you above/below? What’s kind of a sweet spot for frequency of use for each consumer?

I think it’s less about like a weakness sign. That’s why we have on Slide 15 at the bottom, controlled expansion, optimized top line growth with no deterioration in Sezzle’s core customers. We wanted to provide that kind of proxy for delinquencies because we’re not seeing any deterioration. And if you saw customers spending too much, like needing the product, you’d see a deterioration. I think the reason we’re seeing increased utilization from our existing customers or customers in our business is because we’re providing better products than our competitors. I think we’re providing products that are stickier. The customers like it. They like our product. They like using it. And so instead of using a competitive product out there, they’re preferring to come back to ours. I think that’s really the key. Because I think, Nico, I think you’d see deterioration if they were weakened financially and just coming to us because they needed it is, I guess, the point.

Sure. Okay. Last question, is there – from past years, is there any seasonality with your business where like going into a holiday season, you expect a good Q4, and then things kind of tail off in Q1? Just any idea of what the cadence of the next couple of quarters looks like?

Yes, there definitely is seasonality. I mean we’re retail-linked. But it’s a little bit unusual. We’ve talked about this in the past a bit, but a lot of the time during the holiday season, we tend to play a lot of defense. We try to make sure the customers don’t overspend. And I think this is something that new investors, maybe it’s worth hearing for new investors as well, is I think this is where we’re very different than credit cards and I think, in many ways, better for consumers than credit cards because in the holiday season, we try to restrict spending. So in some cases, we lower limits where we see it fit with customer base – some of the customer base. Because if the customer overspends too much, they fail. And if they fail, they can’t make another purchase. And then sometimes if they fail with too big of an outstanding balance, they walk away. It’s common sense. With credit card companies, I think, on the flip side, they’ll never tell you this, but I think they love it when people overspend in the holidays because when they overspend in the holidays, they create a revolver and the revolver becomes a revolver for the next five years, paying interest rates, et cetera. And so I think that’s what and that’s kind of dynamic, I think, really shows why Pay in 4 is a way better credit product, especially for young consumers, as they get into their first credit products because there’s a way less of a chance that someone goes over their skis with our products because we’re basically hand-in-hand, same incentive structure as the consumer to not overspend. We don’t want them to overspend because if they overspend, there’s a greater chance that we lose them forever and we bring the lifetime value to zero. So there’s going to be an increased spending in quarter four. We defend quite a bit while it’s happening. So you’ll see that. And in quarter one, spending goes down. But we’re in the tax season. And a lot of our customers is mid to low income, they get a lot of tax returns, so we tend to have a lower principal loss rate as well where, in the fourth quarter, there tends to be a higher principal loss rate in general because of overspending in the holidays. As much as you try to restrict it, it does happen. So those are sort of the dynamics. It’s really Q4, Q1 are the big seasonalities and then Q2 and Q3 are more normalized.

So just for my understanding, a real-life example of this would be like I have a $500 limit, you’re able to track my, what, spending habits and proactively drop my limit going into the holiday season? How do you actually…

Yes. It’d be less about one by one. But if you look back to that slide, Slide 15, we have this score decile by Baby Prophet, and we’re looking at this. And what we might do is we might say, for new customers coming in with a certain score level, we’ll start at lower levels in the holidays or existing customers, we’ll restrict growth and limits behind the scenes – or not behind the scenes, people see their limits. We’ll restrict growth. Or maybe if there’s some sort of a negative event in the model that we have, it might bring limits down faster in the holidays, if something happens. Like, let’s say, a payment failure occurs, we might bring it down. Instead of a 20% drop in limit, it might be a 35% drop in limit…

Got it.

… just to kind of because we know – and by the way, some [indiscernible] they’re for instances. These are not exact. But that kind of is the gist of what we do.

Okay, understood. All right. Thanks for your time. Congrats on the quarter.

Thanks.

Thank you. [Operator Instructions] Next question will be from Hal Goetsch of B. Riley Securities. Please go ahead.

Hey. Thank you. Can you give us a perspective on how much of your UMS is from monthly subscribers and how much is from the occasional user or an active user but you only use it occasionally and not under a subscription?

Karen, do you have any of that data like at your fingertips?

Yes. We don’t really disclose the sources of UMS externally. We have the breakdown of the revenue streams in our 10-Q.

Yes. Okay.

And I think one area you can find it, Hal, is I think on Slide 8, I think we talked about frequency numbers versus our core customers. So like there’s eight more orders from subscribers versus nonsubscribers during the third quarter on average. So I think probably maybe like you can kind of use that as like a proxy for volumes I think.

Okay. And on the marketing side, you said the election environment crowded you guys out. So what might you have tried to have spent? Or kind of what’s kind of the goal to take spending to on marketing to grow the subscription business? Because there was a – I want to know if there’s a slowdown, that advertising pullback or what you didn’t want to do did cause the number of new subscribers to be different than it was in 2Q.

Yes. The one thing we use is not like a goal in spend, it’s more of a goal on ROI.

Okay.

So we have this like six-month sort of mindset. We want to get our money back in six months, if you look at the lifetime value accumulated versus the expenditure. And so our lifetime value is kind of thing in the same place, that’s really about that tells us what our expenditure can be, and then using that same expenditure number with ballooning costs across all the advertising channels out there. I mean, I don’t know if you were watching TV during the political season, but I was basically watching political ads nonstop. So it basically crowded out reasonable spend during the time period, and that basically kind of pushed us out on some of that spending. And right now it’s not – we’re not totally dependent on that because we have two channels, basically we have two parts of the – two funnels that come into our subscriber or monetized user base. One of those is from direct-to-consumer advertising, which is newer for us. And then the other is our more traditional directly integrated merchant acquisition, which is still happening. And so when we acquire a consumer or a shared consumer with our merchant partners, we can advertise our subscription products. That’s free. So we still have that. It was more of an impact on the newer channel, which is the direct-to-consumer advertising, that we’re more inclined to do now that we have lifetime values that support it.

All right, terrific. Thanks. I’ll get back in the queue.

Thank you. That ends our question-and-answer session. I’d like to turn the call back over to Charlie for closing remarks.

Thank you, operator. In closing, I’d like to thank the Sezzle team again. As I mentioned earlier, we continue to make tremendous strides in our business, and I know it’s because we have an incredibly talented team going in the right direction. And before I go, I wanted to add a quote from one of my favorite investing heroes, Benjamin Graham, "People who invest make money for themselves; people who speculate make money for their brokers." A big thank you to the investors out there and an apology to our investment banking partners for this quote suggestion that people and firms should speculate less. 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.