FlexShopper, Inc. (NASDAQ:FPAY) Q4 2021 Earnings Conference Call March 31, 2022 9:00 AM ET
Company Participants
Jeremy Hellman – The Equity Group
Rich House – Chief Executive Officer
Russ Heiser – Chief Financial Officer
Conference Call Participants
Scott Buck – H.C. Wainwright
Operator
Greetings and welcome to the FlexShopper Fourth Quarter and Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded.
I will now turn the conference over to our host, Jeremy Hellman of The Equity Group. Thank you. 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. I 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. If you joined us for, as always, Russ will be expanding on the key financial aspects of our quarterly results, and I’ll cover some operational highlights.
Our fourth quarter was solid with growth in net revenue and a nice increase in bottom line profitability. Importantly, we are happy note to — note that we increased the year-over-year EBITDA by over 30%. And as we have a better view of how the COVID pandemic is affecting customers, we believe we can grow at a similar or higher rate in 2022.
Throughout the pandemic, our direct-to-consumer FlexShopper.com website has proven to be a key asset and a driver of our lease originations. In the first half of the year, stimulus programs put sub-prime consumers in a stronger liquidity position, and apparently, dampened demand across the rent-to-own industry based on the earnings reports of our peers. We believe that dynamic has lessened considerably in the fourth quarter as COVID-driven stimulus programs wound down. Our data suggests recent payment activity, especially early payoffs, continue to revert to historical patterns.
Our retail partner ecosystem accounted for about 34% of our leases this year. And as COVID-19 surge occurred throughout the winter we receded, we’ve seen a noticeable pickup in leasing activity in this channel. Additionally, as noted in our earnings release yesterday, we expect to see our retail footprint expand during the first half of this year through a mix of new pilot programs and full rollouts. These rollouts have a substantial amount of investment in sales support. However, we believe these are great investments.
I’m going to turn it over to Russ now to address specific items regarding our financial performance, and I’ll come back later to wrap up.
Russ Heiser
Thanks, Rich. As a reminder, the investor deck posted on our website, together with our press release and 10-K, provide significant insight into our fourth quarter and full year operating performance. So I’ll cover just a few of the highlights.
During the fourth quarter, our revenues and fees were up 10.5%, reaching $31.1 million. However, fourth quarter lease origination dollars were down 18% versus the prior year. However, I want to point out, when we include a loan product that we’ve launched, our overall originations were down less than 10%.
The fourth quarter gross profit increased 10.3% to $12.2 million versus the prior fourth quarter. Adjusted EBITDA decreased slightly to $2.0 million versus $2.6 million during the fourth quarter of 2020, but that was primarily driven by marketing increasing by $1.3 million in ’21 versus the prior year quarter.
For the full year, our revenue and fees were up 22.9% to $125.4 million. Our gross profit expanded 30.8% to $46.2 million from $35.4 million. Full year EBITDA expanded 31% to $11.4 million versus $8.7 million.
As a follow-up to some of Rich’s comments, the company will achieve next year’s results by significant spending in the first half of the year in order to support those new retail rollouts. But those investments will enable us to deliver EBITDA growth for the full year of ’22 as at least equivalent to the 31% achieved this past year. In order to support that growth, we’ve increased our capital commitment from our senior lending facility by almost 60% to $82.5 million.
I’ll now pass the call back over to Rich.
Rich House
Thanks, Russ. Overall, we had a solid quarter in a year and fared well despite the headwinds we face in particular. I’m happy with the level of the bottom line profitability and EBITDA growth we were able to report. Looking ahead to the start of 2022, our conditions in our industry appear to begin normalizing and that bodes well for our growth outlook in — for ’22 — 2022.
Before opening the call to your questions, I want to close with some comments on how we think our business is differentiated from our peers in the rent-to-own or lease-to-own industry. First and foremost is our FlexShopper.com website. Our peers do not seem to have a consumer-facing experience as robust as ours or with the extent as operational and underwriting history. Operating our own website like this means we are 100% in charge of our originations in this space, and we’re not dependent on anyone else’s traffic.
While stimulus programs reduced demand for alternative financing across the industry, we were nevertheless able to grow, and importantly, did so while maintaining our underwriting standards. And as all of you have heard me say repeatedly over the last several quarters, proper underwriting is paramount in our business, and we will not sacrifice that to chase consumers that we ultimately expect will become delinquent.
While our customer-facing website is central to what we are and what we do, we’ve obviously made the expansion of our retail partner channel important channel, an important channel — an important part of what we do as well. 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 returns on shareholders’ capitals.
As Russ was suggesting, some of our retail partners and potential retail partners have wanted us to include lending as well as leasing into the product mix for their point-of-sale experience. Over the past year, we’ve been testing unsecured term loans and analyzing the credit risk. Fortunately, our Chief Operating Officer, John Davis, and I have a long history of making these types of unsecured loans. And we’ve done the testing, and the data supports this strategy is going to work and we should extend the strategy, which we believe will add to our growth moving forward in ’22 — 2022.
That concludes our prepared remarks, and we’re happy to take any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Scott Buck with H.C. Wainwright. Please state your question.
Scott Buck
First, Rich, I was hoping maybe you could give us just a little bit more color on this new lending product. I know you called out the example of tire realignments or wheel realignments in the press release. But where else could this be used? What size loans are we talking about? And maybe some of the other mechanics of this lending product would be great.
Rich House
Yes. I think that we’re comfortable going up to — with 52-week lending, we’re comfortable going up to $2,500, but I think the average is going to be about $1,200. And that would be my guess. But they’re unsecured loans, right? But we — that’s what we’re looking at. And it’s issued through a national bank — or Utah Bank, and so we have — we can do it across the nation. So that’s one of our growth channels that we have that we are very comfortable with so.
Scott Buck
And then on the 500 retail store rollout, though, on the brick-and-mortar side, were those all conversations that were taking place pre-COVID or at the beginning of COVID? Or how many of those are more recent conversations that have turned to pilot programs, stuff over the last six to nine months?
Rich House
It’s more recent. During COVID — I guess — we’re still in COVID, I guess. But we really began rolling it out in January. So it’s something that we have two additional partners and two additional retail partners, and that’s what we’re growing right now.
Russ Heiser
To your point, I mean, a lot of these were conversations that started and stopped as COVID sort of surged and stepped back. And they — the conversations did start occurring longer ago than you would expect given that we’re just having opportunity to roll up now. And this is all just due to COVID slow-ups, et cetera.
Scott Buck
And then, Russ, marketing spend was up meaningfully in the quarter, but originations were down. I’m just trying to understand, maybe what’s the marketing effort look like? And should we get hung up on one-quarter originations? Or are those marketing dollars going to be driving revenue over the first and second quarter of ’22 as well?
Russ Heiser
A lot of these — a lot of what’s falling into marketing spend isn’t always — as we do some of these rollouts, isn’t always the direct marketing expense that you’re used to seeing in the past. And so some of these dollars are going out into sales support staff, educating the stores, getting materials for the stores, all essentially sort of preloading originations, if you would, for the next couple of quarters.
Rich House
Yes. I think that’s something to note is like we — as we have made these agreements to grow — to roll out these 500 stores, we’ve had to hire people and sales materials, et cetera, and some online marketing to grow these stores. So it will suppress Q1, which we believe it’ll substantially increase our EBITDA for the rest of the year.
Scott Buck
And then last one for me. Average size of an origination was up nicely year-over-year. Is that stemming from kind of a return to some of the brick-and-mortar? Or what’s driving that increase? And how much more room do we have to take that higher?
Rich House
It’s is more of an optimization exercise we’re using online to figure out how to entice customers to get the highest product — highest-priced product. There’s some retail element to it as well. But there’s — that’s — you always want that effort to happen because, right, you always want the highest average order value you can have. So — but there’s no magic to it. It’s just what we’ve been doing.
Operator
[Operator Instructions] And we do have another question from the line of Scott Buck with H.C. Wainwright. Please go ahead.
Scott Buck
Sorry, guys. So I figure I’d throw another one in there. Just generally, Russ and Rich, if you could speak about credit trends, what you’re seeing and maybe what the expectations are for 2022. We talked about normalized volumes and demand, but is credit normalizing as well?
Rich House
We generally have not seen any total deterioration in credit. What we have seen is, in the past year, some of our better customers may have been picked off a little bit by the buy now, pay later or credit card companies which is fine, but we’re seeing that normalize now. So that’s why we feel good about the credit trends. But we’re very disciplined about that, right? So we don’t — we haven’t seen any deterioration in credit by score ranges.
Scott Buck
Rich, is there an opportunity for you guys to get more aggressive there?
Rich House
There is. There is an opportunity to do that, and we’re looking at it. And that’s one of the things that we’re exploring as we look at the lending and leasing opportunities.
Operator
There are no further questions at this time. I’ll turn the floor back to management for closing remarks.
Rich House
I don’t think we have any closing remarks other than we’re going to continue to grow. We feel good about our growth this year, and we’ll look forward to talking to you guys next quarter.
Operator
Thank you. This concludes today’s conference. All parties may disconnect. Have a great day.
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