Sezzle achieves 67% revenue growth in Q3; shifts focus to subscription products amid high engagement metrics and improved profitability outlook.

OPERATOR - (00:00:00)

Incredible growth and cutting people is not something we need to do other than for performance. We view AI as a tool to enhance our team's productivity, allowing us to further leverage our infrastructure and scale the company faster with more efficient product launches and expansions. So in the case of customer service, it's likely that we'll scale incredibly well here over the next couple of years as the AI tooling continues to evolve and expand its ability to serve end customers. But the way we operate, you'll likely just see that the support team size doesn't grow and may even shrink over the next few years as our efficiency with technology replaces the need to backfill members of the team. Our existing members will take on more complex cases and help train the AI systems in place to do more and more Our marketing efforts are focused on the consumer, with the primary goal of acquiring new users but also reducing churn. The combination of new feature launches and our marketing efforts are reflected in our strong engagement metrics. On slide 5, you can see the step up in our quarterly marketing and advertising spend. While we love all consumers that use Sezzle, the ones that with the greatest lifetime values are those that engage Sezzle as either an on demand user or as a subscriber. As most of you are aware, we created the definition of monthly on demand subscribers, also called MODs, in the fourth quarter of 2024. When we launched Sezzle On Demand, we anticipated On Demand would allow us to reach more consumers that might be averse to joining a monthly subscription product. However, we also expected it to cannibalize our subscription product. We just didn't know to what extent. Initially, we put most of our marketing dollars towards on demand because there's less friction to join relative to subscription. And you can see from the results that we quickly grew that product to 264,000 monthly users at the end of the second quarter. However, you can also see that our subscriber count shrank from 529,000 users at the end of the third quarter 2024 to 484,000 users at the end of Q2 2025. By the end of the second quarter, we had enough information to evaluate the effectiveness of On Demand. The engagement on the front end was good, but the follow through on conversion was not as good as we would like. What do I mean by follow through on conversion? When we launched On Demand, there were three key enterprise opportunities: one, drive increase conversion activity at the point of sale and number three convert a customer over to subscription. Eventually, On Demand has clearly positioned us to be more aggressive with enterprise merchants and I'm happy to note a few wins on slide 5 as a result. However, it didn't deliver like we hoped on conversions at the point of sale or over to subscription. Further, the profit profile for On Demand is less than our premium and anywhere subscription products. We still believe on demand is a great tool and it's a great tool to have in our tool belt, but we have adjusted how we go to market with it. We're going to continue to lean into it for winning over merchants, but on the consumer side we're going to lean back into subscription, with on demand only being used as an alternative tool when it's apparent subscription can't do the job or is meeting some resistance with an individual consumer. As you can see from the results, we pivot our marketing advertising spend towards subscription products in Q3, with subscribers rising to 568,000 at the end of the third quarter, we remain disciplined in our costs with a payback on marketing for consumer acquisition at six months or less across the board. Our engagement metrics on slide 6 reflect the strong momentum we have in our business. Terrific year on year and quarter on quarter performance. My two favorite metrics on this slide are MODs and purchase frequency. Mods is a good indicator of consumer activity within sezzle over the last 30 days and seeing such strong growth in our highest LTV products is fantastic. While the rise in purchase frequency suggests we are moving to the top of the consumers wallets, you can see the same sequential Dynamics on slide 7. Before turning the call over to Karen, I would like to give more details on our corporate strategic project costs that were called out in our earnings release and later in the presentation. During the quarter, these items added up to about 1.3 million in costs. While these costs are relatively minor, they potentially have some pretty big outcomes. We decided to break these out because they aren't a part of our core activities. While they aren't material, we wanted to make investors aware of them. First, our antitrust suit. For obvious reasons, we can't discuss the case, but if you'd like to learn more, you can go to our investor site where we have posted the suit. There we will find out in December if the case will continue forward as the defendant has petitioned the court to dismiss the case. Second is our capital markets exploration. We have talked in the past about our desire to refinance the credit facility. Given the size of only 150 million and price of SOFR plus 675bps, we have decided to exercise the $75 million according with our current lenders as we head into the holidays. And this will give us more time to evaluate our options. You will see in our 10Q that will be filed tomorrow morning the amendment to our current facility which increases the size of the facility from 150 million to 225 million. Lastly, our banking charter discovery process. We have hired consultants and attorneys to assist us. Yes, we have an ILC bank partner in Web bank and they are fantastic. We believe that holding an ilc, which is an acronym for Industrial Loan Company is the right long term path for us as it doesn't subject us to becoming a bank holding company which has all sorts of implications about capital, capital allocations, et cetera. We believe it will be accretive and add greater efficiency to our business. This is a long process and not a guarantee process. If we apply, we anticipate submitting an application in the first half of 2026. If we don't get it, it doesn't change what we're doing and it would not affect the outlook we have. With that, I'd like to turn the call over to Karen to review in further detail our Q3 results. But before I turn it over to Karen, I wanted to let investors know that Karen is retiring and that we're going to miss her dearly. Karen and Ameen Sab Savann, our chief Operating Officer, both joined the company on the same day. And I always say that day was one of the best days Sezzle's ever had. We're going to miss her infectious positivity and her total perfection in completing every task given to her and her team. But I also wanted to tell her how much I've appreciated her support and help along the way. We're definitely going to miss you, Karen. The plan is for Karen to stick around with us for the next 12 months as we transition. And we really feel great about that plan. And I'm also really happy Karen gets to step away in such a great way. Karen, take it away.

Karen - (00:06:50)

Aw. Thank you, Charlie. And good evening to all those joining us. The enhancement of our product experience and deeper consumer engagement drove remarkable results for the quarter. As seen on slide 8, total revenue continues to grow at an exceptional pace, increasing 67% year over year to 116.8 million. Our profitability followed a similar growth trend with GAAP net income and adjusted net income growing over 50% to 26.7 million and 25.4 million respectively. Our margins held steady year over year with an adjusted EBITDA margin of 33.9% and total revenue less transaction related cost of 54.2%. Most importantly alongside our growth is our ability to scale efficiently evidenced by our non transaction related operating expenses decreasing 2.9 percentage points year over year to 27.1%. Now turning to slide 9 which highlights our top line growth. GMV increased 58.7% year over year, making our first $1 billion quarter. As Charlie discussed earlier on slides 6 and 7, growth in active consumers and higher transaction frequency drove this milestone. Our take rate, defined as total revenue as a percentage of GMV rose 60 basis points both sequentially and year over year to 11.2%. The focus on high LTV products that Charlie outlined on slide 5 is a key driver of take rate strength and we believe that focus positions us well to sustain this rate going forward. On slide 10 we note our transaction related costs with detailed components outlined on slide 11. Overall transaction related costs as a percentage of total revenue and GMV increased year over year due to our strategic decision to expand our underwriting aperture and drive top line growth. Specifically, third quarter provision for credit losses as a percentage of GMV increased 70 basis points year over year to 3.1% and is trending toward the lower half of our stated 2025 provision target, likely between 2.5 and 2.75%. Despite the slightly higher transaction related costs, total revenue less transaction related costs as seen on slide 12, continues to grow robustly, increasing 64.5% year over year to 63.3 million and representing 54.2% of total revenue. I know we've touched on this during our prior two earnings calls of 2025, but we think it's important to continue emphasizing that the expansion of our underwriting isn't without carefully balancing the profitability of the growth we're experiencing. Recent headlines on A few lending companies have also called into question the sustained sustainability of certain sectors of the consumer credit market, but we haven't seen any deterioration as consumer activity continues to perform in line with our expectations. But that is not the nature of our product or our business model. As we outlined on slide 13, not only do our strong gross margins provide us with great flexibility and room to maneuver, but the short duration of our lending product allows us to pivot quickly and adjust our strategy upon seeing any early sign of deterioration in our portfolio performance on Slide 14, you'll see that despite the incremental costs we've incurred in long term corporate strategic projects that Charlie previously covered, we continue to maintain cost discipline and leverage our fixed cost structure non transaction related costs increased 50.9% year over year to 31.6 million. That decreased 290 basis points as a percentage of total revenue. In the third quarter we incurred 1.3 million in costs related to these projects, with the largest being the exploration of potential financing avenues, an effort that will continue in a more streamlined manner in fourth quarter. The remaining expenses that make up the core of this bucket personnel, third party technology, marketing and GNA increased sequentially, largely driven by the timing of equity and incentive compensation in our personnel costs. Bringing the full picture Together on slides 15 and 16, GAAP net income grew 72.7% year over year to 26.7 million and adjusted net income increased 52.6% year over year to 25.4 million. GAAP profit margin expanded 70 basis points year over year to 22.8% while our adjusted adjusted profit margin decreased 2 percentage points to 21.8%. Despite this decrease, our margin still remains above our internal goal of operating the business to an adjusted profit margin of at least 20%. Lastly, adjusted EBITDA grew nearly 74.6% year over year to 39.6 million, representing a 33.9% adjusted EBITDA margin. Turning to our balance sheet on Slide 17, total cash grew $14.7 million in the quarter to $134.7 million. Even with paying down our line of credit by $13.3 million, cash flow from operations for the quarter was $33.1 million, bringing year to date cash flow from operations to $55.6 million. These results demonstrate the strength of our balance sheet and our ability to self fund growth while maintaining flexibility in our capital structure. Finally, turning to our outlook on slide 18, we're reaffirming our guidance for top line growth and adjusted net income with modest adjustments to our GAAP net income to reflect the impact of our year to date discrete tax benefit to our EPS to reflect adjustments related to our estimated diluted share count and to adjusted ebitda. The discrete tax benefit raises our GAAP net income guidance to 125 million while the updated diluted share count increases our GAAP EPS to 352 and adjusted EPS to 338. As for our adjusted EBITDA, we're raising our range from 170 to 175 million to 175 to 180 million. Lastly, we are also providing adjusted EPS guidance for 2026 at $4.35 reflecting 29% growth over our 2025 adjusted EPS. While this guidance does not reflect any of the future potential products outlined at the beginning of our presentation, we wanted to give investors a view into the strong fundamentals of our business and our confidence in sustained growth moving forward. Thank you. I will now turn it over to the operator for Q and A.

OPERATOR - (00:14:25)

Thank you. We will now begin the question and answer session. To ask a question, you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, Please press star then 2. The first question comes from Mike Rondol with Nordland. Please go ahead.

Mike Rondol - Equity Analyst - (00:14:50)

Hey, thanks guys. Maybe the first one for Charlie. Charlie, can you talk a little bit about when you deemphasized on demand in Q3 and how you think that's going to affect sort of growth going forward, if at all?

Charlie - (00:15:08)

Yes, it was probably right around the middle of the quarter. You know, we, at that point we, we felt we had enough data based on what it's been seeing on, you know, conversion at point of sale, conversion into subscription, you know, and the bridge just wasn't as strong as we were originally envisioning, I guess, is the main point. Conversions, I think, were slightly better into on demand at point of sale than they are into subscription, but just not enough to make the payout worthwhile. And so when we started to analyze the lifetime values of the customers, the conversion rates, we really started to realize that on demand is probably just a better tool around the fringes, at least in the direct to consumer portion of our business. It's still part of the mix, but it's really the tool that we're going to lean into more on the merchant side to win over more enterprise merchants that are sensitive to margin pressures, et cetera. And then on the consumer side, we really just want to lean back into subscription and maybe use on demand as a fallback. If some consumers are resistant to subscription or whatever it might be, then in terms of your second part of your question, Mike.

Mike - (00:16:15)

Yeah, just how do you see that maybe affecting growth? And as a follow up to that, is your customer who maybe was going to pick an on demand product, can you direct them into subscriptions? How does that work? How will you be successful there?

Charlie - (00:16:36)

Yeah, we basically pick and choose what we want to present to each individual consumer. And then in terms of growth, you know, I think GMV growth is lower if you go the subscription route. But you know, if you think about Pushing more into stronger lifetime values, maybe not upcoming, you know, it's hard to say about the next quarter, but the next quarters we should see better growth on revenue and income. That's the main point of that decision is because the lifetime value differences multiplied by the conversion differences tell us the better story is to go into subscription.

Mike - (00:17:12)

Got it. Then maybe just one more. Can you talk a little bit about take rate trends? And then the 3.1% credit losses was maybe a little bit higher by deemphasizing on demand. Will that naturally drop a little bit more?

Charlie - (00:17:31)

Well, the take rate trends, I think we really shoot for the 60% gross margin that we talked about in the past. And so when we think about the take rate, it's take rate minus our COGS getting us to 60%. And that's also how we sort of do the planning around our provision for loan losses plans for the year. And so the 3.1% provision for loan losses for the third quarter, basically right in line with what we were expecting, you know, if, you know, some of the people on the call remember to have followed us for a while back in May, we talked about, you know, rest of year, think about a 2.5 to 3% provision for loan losses for the entire year. And we had already posted some, some lower provision for loan lossess, lower than that range, which means, of course, we expect some of the third quarter, fourth quarter to be above that range because then you blend out into within the range. We did just update the guidance to tighten it a bit so investors would know that we're looking. It looks like it's being more in the bottom end of the range, the 2.5 to 2.75 for the overall year. So the 3.1 I'd say basically fits right into what we were expecting. And then on demand, you do bring in more because the conversion is slightly better in on demand. And I say slightly, but it does mean you bring in more new consumers into those products and then more new consumers 10 to lead to a higher provision for loan losses. Less new consumers leads generally a lower provision for loan losses because new consumers have higher provision for loan lossess in general. So I think that'd be the only thing to call it there, Mike.

Mike - (00:19:00)

Okay. Hey, thank you.

Charlie - (00:19:02)

No problem.

OPERATOR - (00:19:06)

The next question comes from Hal Gooch with B Rally Security. Please go ahead.

Hal Gooch - Equity Analyst - (00:19:13)

Hey, Charlie, thanks for everything today. Great detail. Just wanted to ask a little big picture strategy on what you're seeing, what your thoughts are in BNPL, broadly in the United States. I mean, just, you know, PayPal talks about it quite a bit and on their last call, more than ever. And I was struck to see how actually small it is, how fast growing it is for all the different players in this, in the space and they call out as a replacement for. They're seen as a major trend in the replacement of credit cards. It's more user friendly. Could you tell us how big you think the market is for pure play? BNPL is right now in the United States. How fast you think it's growing and why you think it has many, many years ago. Thanks.

Charlie - (00:20:01)

Yeah, I don't have an exact number for you Hal, but you know, I just go by, you know. But I think the trend is going to be here for years upon years. If you look at credit cards, they were launched in the 1950s and how long did that trend last? People are riding the credit card trend for some time. I'm not going to say that we're going to have a 75 year Buy Now, Pay Later (BNPL) trend, but I think that it's pretty obvious that a lot of consumers out there prefer to use Buy Now, Pay Later (BNPL) over a credit card. And in some places they also takes a little bit away from debit card. It doesn't really take away from debit card. I guess in the end because people are paying us back with debit in the vast majority of cases. But it replaces is like the full purchase of a debit card user as well. But what I think it, I think, you know, customers aren't stupid. They look at the total cost of ownership of a product and I think they also look at Buy Now, Pay Later (BNPL) as a safer product for them. I almost feel like some of these customers view us as like they really do view us as a budgeting tool, but almost like we're their nanny, like watching over them, not allowing them to overspend where credit cards allow people to overspend. No one in a credit card company would ever say it probably. But that's the win when someone overspends. Because now you've got a revolver for us. When people overspend a lot we're worried, we're worried that we allowed them to overextend and now they're not gonna catch up. We might lose the customer. So we're always trying to allocate spend to the customer in a way that is in total alignment with responsible spending. And then I think that overall lowers the cost of ownership of that credit product for the customer. It also dramatically reduces the risk of a bank personal bankruptcy which is how do you even put a price on that? So I think a lot of the customers are probably shying away over time from migrating into a credit card because they just feel a lot safer and more comfortable with our credit product.

Hal - (00:21:52)

Thanks, Charlie. As one follow up toward the end of your press release on initiatives update, you talk about some of the products you've been building for shoppers to increase engagement and monthly active users grew 38% over year, revenue generating users versus 120% year over year. And monthly sessions climbed 78% year over year. I use some new KPIs. I mean once you could comment on that and tell us what you've built and why it's contributing to some of. Those. Growth figures that you demonstrated in the press release. Thanks.

Charlie - (00:22:29)

Yeah, so we talked about the shopping as being a big initiative for us for 2025 and 2026. It'll be probably a two year initiative to keep on rolling out these shopping features and these initiatives. I said the 'Earn' tab is kind of in that mix. Although maybe not directly a shopping feature. What we're trying to do is trying to keep drive and create value for our customers. Think middle of America, mid to low income younger consumers, maybe new families. We want to drive value through giving them couponing, giving them discounting, price comparison, the ability to earn, you know, almost like gig economy type earnings, you know, not massive type job numbers but you know, on the fringe helps. And what we're the reason, what we're seeing from doing all of that, which you pointed out, Hal, is we're seeing increased activity in the app and our view is that's just a big win. So we're monitoring those KPIs closely because the viewpoint is if you get the customer coming back in the app and returning and returning and returning over and over again, you're also going to increase retention and also give yourself a chance to introduce that customer to a subscription product at some point. Maybe they're here in early November, they're not interested, they open the app back up later in November. Okay, let me sign up for anywhere. And now they're in. And that's really done by creating value, adding value, presenting that value in the app and getting that customer to keep on coming back. Terrific.

Hal - (00:23:58)

Thank you.

OPERATOR - (00:24:03)

The next question comes from Raina Kumar with Openheimer. Please go ahead. Good evening.

Raina Kumar - Equity Analyst - (00:24:09)

Thanks for taking my question. It was really helpful to get the preliminary 26 EPS guidance.

Raina - (00:24:15)

Can you just talk about some of. The underlying drivers of that target, Maybe revenue growth, GMB growth and your expectations for provisioning. Thank you.

Charlie - (00:24:27)

Yeah, we don't have the call outs for the underlying numbers on it, but I'll tell you the Overall theme is we do believe that we're going to continue to see continued growth in our subscription in our mods, but probably leaning more towards subscription into 2026. We're going to be cost conscious as always. And you know, people have followed us for some time, you know, that we really think quite a bit about growing gross margin dollars at a much faster pace than growing our operational expenses. So that's a part of that. You know, the guidance we gave for the entire year 2025, the 2.5 to 3, we're basically kind of thinking the same ballpark there. Like we like that ballpark because of our top line. The top line numbers that were our take rate kind of really fits along the lines of maintaining the PLR kind of thoughts that we've had from, you know, 2025. And then if there's any, you know, maybe conservative conservatism in there at all. It's just the economy, you know, we're not seeing anything with our consumer, but you know, we're watching it closely. Obviously we have the government shutdown. I don't think it's going to continue into 2026, but I think if there's a bit of conservatism, it's based on the economy and what might happen.

Raina - (00:25:45)

Understood. And then just as a follow up, can you comment on just what you're. Seeing out there in terms of competition? Are you seeing any changes in pricing or strategy from your competitors?

Charlie - (00:25:58)

Not really. I haven't noticed any major. I think we saw Klarna launch a subscription product as well, but it seems like a much higher dollar subscription product. So that was like the, you know, one. One of the companies kind of leaning in our direction in terms of product offerings. But other than that, it seems like more of the same.

Raina - (00:26:20)

Great. Thanks for the color.

Charlie - (00:26:23)

No problem.

OPERATOR - (00:26:26)

The next question comes from Wong Yuan with CD Cohen. Please go ahead.

Wong Yuan - Equity Analyst - (00:26:32)

Good evening and thanks for taking my question. Maybe a quick one for Charlie. So since you are pivoting back to subscriptions now, maybe can you talk about, you know, maybe the difference this time in terms of marketing posture versus I guess the last time before you launched on demand. How is this time different from the last? And you know, I think last time I think you were tracking at net add on subscription maybe 60 to 70k a quarter. I mean, should we expect you guys to get back to that level going forward? And maybe in terms of pricing, I noticed that you recently took pricing actions on new subscribers. So can you talk a little bit about that as a lever in terms of top-line going forward. Thank you.

Charlie - (00:27:19)

Yeah, I'll probably avoid the guidance on how many ads to subscription quarter by quarter, but we did increase pricing on both the subscription products just by a dollar or two per month. Really viewed as just a inflationary type increase because we launched the products three years ago or so and there's been some inflation in the United States. So that's the main reason for those changes. And then I guess the start of your question, can you repeat it again just to make sure we got it nailed?

Wong - (00:27:49)

In terms of marketing for the subscription marketing. Yeah. Is it different this time, but this last time maybe a year ago before you launch on demand?

Charlie - (00:27:57)

Yeah. To give investors a view of like how we market the product. So when we are leaning into on demand, it's. It is a more seamless, like you know, first step into a purchase because basically, let's say you want to check out at, you know, Lowe's or somewhere, you know, some of one of the apps or one of the merchants in our app or, you know, you're shopping out there. We would not bring up a subscription. In most cases, like the option to sign up for a subscription right away to the consumer, we would basically just bring up a purchase request. Like, you know, in the lending lingo, a TILA Truth in Lending approval or purchase requests is what we call it internally. We bring up a purchase request which it would show the on demand fee, the customer would just accept it, they get the on demand fee and then they, they make the purchase. Now basically the difference in marketing and the landing page, a lot of landing pages, a lot of things we're doing towards advertising, it's all about bringing that funnel. But once they get into the funnel, into the app, that's what the customer would see is basically they go right into a purchase request. Now most customers are seeing is if you want to go and use our product at point of sale or if you want to shop at one of the many merchants in our app, what we're bringing up now is the option to join our subscription. And so that's basically the biggest difference. So marketing wise, it's just the funnels driving them into a different choice. And like I mentioned, there is a slighter decrease in conversion into subscription. But based on what we've seen from conversion at point of sale into subscription and then conversion from on demand users into subscription, we viewed it as a much better decision from a lifetime value standpoint to just go straight to offering subscription to many of these customers.

Wong - (00:29:49)

Got it. And I didn't see the chart on approval rates on the presentation this quarter. Maybe. Can you talk a little bit about that? You know, whether you have. There has been any change in terms of your underwriting this quarter. Thank you.

Charlie - (00:30:01)

No, I mean, well, we've always been. We are launching new models. So we did launch some new models this quarter. And those, the point of those models, what we like to do is we like to keep approval rates the same level and reduce plr. That's usually what our goals are with our new models. So I think approval rates are probably around the same levels as we presented in the past. But with the new models in place, we believe we should have lower PLRs for those new customers coming in.

Wong - (00:30:34)

Got it. Thank you.

OPERATOR - (00:30:41)

This concludes our question and answer session. I would like to turn the conference back over to Charlie Joachim for any closing remarks. Please go ahead.

Charlie - (00:30:50)

Thank you. And as people know, I like to usually give a Buffet or a Munger quote or story, but I've got one here from Buffett. It starts when he was just 10 years old. He scraped together $114.75, all the money he had, and he bought three shares of Citi's service preferred at $38 a share. At first, the stock drops to $27, and like a nervous young investor, he starts sweating. Then it crawls back up to 40. So he sells. He's relieved. He even makes a few bucks. But here's the kicker. A little later, that same stock shoots up past $200. Buffett said if I just held on, I would have made a lot more money. That, he says, was his first real lesson in patience. Here's another data point from Buffett that also speaks to the power of patience. I think this crazy stat speaks for itself. Over 99% of Buffett's wealth came after his 50th birthday. That's the quiet miracle of compounding. It's not flashy, it's not fast, but it's relentless if you let it do the work. Buffett always says, my life has been a product of compound interest. And also, the stock market is a device for transferring money from the inpatient to the patient. So the real trick, start early, stay patient, and let time, not emotion, do the heavy lifting. Because in the end, wealth doesn't come from timing the market. It comes from time in the market. That's the $114 lesson. I'd like to thank everyone for joining the call today and also thank the SEZZLE team for continuing to create wins for our consumers and and for our investors. Thank you all. Have a Good night.

OPERATOR - (00:32:33)

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