Sezzle Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods. Sezzle operates a buy-now-pay-later platform, principally in the U.S. and Canada, and said it was winding down operations in India and certain European countries.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total income | $40.8 million | $30.4 million | $110.5 million | $87.3 million |
| Operating income (loss) | $5.3 million | $6.5 million | $14.5 million | ($33.2 million) |
| Net income (loss) | $1.3 million | $4.3 million | $4.2 million | ($38.7 million) |
| Diluted EPS | $0.23 | $0.73 | $0.74 | ($7.13) |
Q3 operating and net margins were approximately 13.1% and 3.2%, respectively, versus 21.4% and 14.3% a year earlier. Nine-month operating and net margins were approximately 13.2% and 3.8%; the prior-year periods were loss-making. These margins are calculated from reported income and earnings.
- Q3 total income rose 34.3%; nine-month income rose 26.5%. Subscription-led income from other services increased to $13.8 million in Q3 from $5.3 million, and to $31.6 million year to date from $14.4 million. Transaction income increased 7.9% in Q3 and 8.2% year to date.
- Q3 provision for credit losses was $6.7 million, up 17.5% year over year; it was 16.3% of income versus 18.7%. Nine-month provision fell to $12.7 million from $24.0 million, or 11.5% of income versus 27.5%.
- Net interest expense increased to $4.1 million in Q3 from $2.2 million, and to $11.5 million for nine months from $5.5 million. The line of credit’s effective annual rate was 20.70% for Q3, compared with 7.95% in 2022.
- Nine-month operating cash flow was negative $10.7 million, versus positive $7.1 million in 2022. Investing cash use was $1.0 million; financing provided $9.2 million. Cash, cash equivalents and restricted cash decreased $2.5 million to $66.8 million.
Financial position and liquidity
At September 30, 2023, cash and cash equivalents were $65.2 million; restricted cash was $1.7 million. Net notes receivable were $102.5 million, against an $8.6 million credit-loss allowance. Total assets were $179.9 million and stockholders’ equity was $18.0 million. Working capital was $92.8 million, up from $70.9 million at December 31, 2022.
Line-of-credit principal was $75.9 million, secured by eligible receivables; unused capacity was only $15,102. A separate $250,000 of long-term debt was reported. Merchant accounts payable were $68.2 million, including $51.9 million in the merchant interest program. Management stated that available liquidity and expected operating cash flows should meet working-capital and investment needs beyond the next 12 months, while noting there can be no assurance.
Material changes, outlook and risks
- Underlying Merchant Sales (UMS) rose 11.4% in Q3 to $469.5 million, which management attributed largely to Sezzle Anywhere; nine-month UMS fell 5.3% to $1.22 billion as the company prioritized profitability. Active merchants declined 27.8% from December 2022 to 30,000, and active consumers declined 12.8% to 2.6 million. Management cited exiting low-volume or unprofitable merchants and tighter underwriting, respectively.
- Management said fourth-quarter income and UMS have historically been strongest due to holiday spending, typically accompanied by higher charge-offs. No numerical earnings or revenue guidance was provided.
- Management attributed lower year-to-date credit provisions partly to its Prophet Score risk model and lower UMS. Actual losses may differ from estimates; consumer delinquencies, defaults and weaker spending could pressure results and liquidity.
- The company adopted CECL on January 1, 2023; adoption reduced the allowance and increased retained earnings by approximately $0.9 million. A 1-for-38 reverse stock split took effect May 11, 2023; reported share and per-share figures were retrospectively adjusted.
- Q3 2022 operating expenses included an $11.0 million reimbursement of merger-related costs, making year-over-year expense and operating-income comparisons less directly comparable. The proposed Zip Co merger had been terminated.
- Future marketing commitments were up to approximately $1.3 million at quarter-end, down from $19.4 million at year-end 2022. The filing describes ordinary-course legal matters and states it does not expect them to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth, particularly Sezzle Anywhere, is recurring and sustainable, and how it affects UMS and profitability.
- Credit performance, including delinquency trends, charge-offs and recoveries, allowance assumptions, and the effect of tighter underwriting on consumer activity.
- Liquidity and refinancing exposure given the high line-of-credit rate, near-full utilization, and limited remaining borrowing capacity.
- Whether operating cash flow improves as receivables and merchant-program balances change, and whether management’s stated liquidity expectation remains supportable.
- The effect of Q4 seasonality and potentially higher holiday-period charge-offs on earnings and cash flows.