Business Overview and Company History
Sezzle Inc. (NASDAQ:SEZL) is a purpose-driven payments company on a mission to financially empower the next generation. Founded in 2017, the company has built a digital payments platform that allows merchants to offer their consumers a flexible alternative to traditional credit. Through its unique offerings, Sezzle aims to enable consumers to take control of their spending, be more responsible, and gain access to financial freedom.
Sezzle’s journey began in 2017 when it was launched as a digital payments platform that allows merchants to offer their consumers a flexible alternative to traditional credit. The company’s flagship product, pay-in-four, enables consumers to pay for purchases in four interest-free installments over a 6-week period.
In its early years, Sezzle focused on growing its merchant and consumer bases, working to integrate its platform with e-commerce providers and build brand awareness. The company faced challenges in navigating the complex regulatory environment for consumer financial services, having to comply with various state-level laws and requirements. Despite these hurdles, Sezzle was able to establish a strong foothold in the emerging buy now, pay later industry.
By 2021, Sezzle had expanded into Canada and was serving over 2 million active consumers through a network of 15,000 active merchants. The company successfully weathered the COVID-19 pandemic, which impacted consumer spending, by tightening underwriting standards and focusing on profitability alongside growth. In a strategic move, Sezzle delisted from the Australian Securities Exchange in 2023 to trade exclusively on the Nasdaq.
In 2024, Sezzle reached several significant milestones, including surpassing 2.7 million active consumers and 23,000 active merchants. The company’s partnership with WebBank has been crucial in simplifying its regulatory compliance and enabling the introduction of new products.
Over the years, Sezzle has expanded its product suite to include alternative payment options, such as pay-in-two and pay-in-full, catering to the diverse needs of its consumer base. The company’s offerings are generally free for consumers who pay on time and use a bank account for their installment payments, excluding the first payment, unless they opt for one of Sezzle’s two paid subscription products: Sezzle Premium and Sezzle Anywhere.
In 2023, Sezzle launched Sezzle Anywhere, a paid subscription service that allows consumers to use their Sezzle Virtual Card at any merchant online or in-store, subject to certain restrictions. The company also introduced a pay-in-two option for consumers who do not qualify for the pay-in-four product. These strategic product expansions have been crucial in enhancing the consumer experience and driving the company’s growth.
Sezzle’s revenue model is primarily based on charging merchants fees in the form of a merchant processing fee, which is typically a percentage of the underlying sales value plus a fixed fee per transaction. The company also generates revenue from its paid subscription offerings. Additionally, through partnerships with third-party lenders, Sezzle enables its consumers to access interest-bearing monthly fixed-rate installment loan products for larger-ticket items.
The company’s operations are currently focused on the United States and Canada, with plans to wind down and exit its presence in India and certain European countries.
Financial Performance and Ratios
Sezzle has demonstrated impressive financial performance, with the company reporting record revenue growth and profitability in recent quarters. In the third quarter of 2024, the company reported a 71.3% year-over-year increase in total revenue, reaching $69.96 million. This robust growth was driven by a 41% increase in Underlying Merchant Sales (UMS) and a 167% rise in subscription revenue.
The company’s adjusted net income for the third quarter of 2024 was $17.3 million, representing an adjusted net income margin of 24.7%. This marks the second consecutive quarter in which Sezzle’s adjusted net income margin has exceeded 20%, a significant achievement. Additionally, the company’s EBITDA margin for the third quarter was 32.2%, up from 18.5% in the prior-year period, showcasing its ability to leverage its cost structure and drive operational efficiency.
Sezzle’s financial ratios further highlight its strong performance. As of September 30, 2024, the company had a current ratio of 2.39 and a quick ratio of 2.39, indicating a robust liquidity position. The company’s debt-to-equity ratio stood at 4.16, suggesting a leveraged capital structure.
One of the key metrics that Sezzle tracks is the provision for credit losses, which was 17.7% of total revenue in the first nine months of 2024, up from 11.5% in the prior-year period. The company attributes this increase to higher UMS and changes to its consumer underwriting to promote profitable top-line growth.
For the most recent fiscal year (2023), Sezzle reported revenue of $159.36 million, net income of $7.10 million, operating cash flow of -$25.69 million, and free cash flow of -$27.06 million. The company’s performance has significantly improved in the most recent quarter (Q3 2024), with revenue of $69.96 million, net income of $15.45 million, operating cash flow of $39.93 million, and free cash flow of $5.43 million.
Sezzle’s revenue is classified into three main categories: transaction income, subscription revenue, and income from other services. Transaction income, primarily driven by merchant processing fees, totaled $42.94 million for the nine months ended September 30, 2024, down from $57.25 million in the prior year period. This decrease was due to a higher concentration of UMS volume transacted through Sezzle’s subscription products, which have lower merchant processing fee rates.
Subscription revenue has become an increasingly important revenue stream for Sezzle, totaling $57.38 million for the nine months ended September 30, 2024, up from $17.77 million in the prior year period. This significant increase was driven by growth in Sezzle’s Active Subscribers, which reached 529,000 as of September 30, 2024, up from 307,000 as of December 31, 2023. Subscription revenue comprised 33% of total revenue for the first nine months of 2024, up from 16% in the prior year period.
Income from other services, including late payment fees, gateway fees, and marketing revenue, has also shown strong growth. Late payment fees totaled $13.53 million for the nine months ended September 30, 2024, up from $7.02 million in the prior year period, reflecting an increase in the number of orders becoming past due.
Liquidity
Sezzle has also demonstrated strong cash flow generation, with free cash flow of $39.93 million in the first nine months of 2024. As of September 30, 2024, the company had $80.06 million in unrestricted cash and an additional $17.9 million available on its line of credit, providing ample financial flexibility to support its growth initiatives.
The company has a $150 million revolving credit facility with a current outstanding balance of $95 million. The facility has a maturity date of April 19, 2027, and bears interest at 3-month SOFR plus 6.75%, with a SOFR floor of 2%.
Strategic Initiatives and Outlook
Sezzle’s strategic focus has been on expanding its product offerings, enhancing the consumer experience, and driving profitability. The launch of Sezzle Anywhere and the introduction of the pay-in-two option are testament to the company’s commitment to innovation and meeting the evolving needs of its customer base.
In April 2024, Sezzle announced a partnership with WebBank, a move that has simplified the company’s business operations and regulatory compliance. The partnership has enabled Sezzle to introduce new products, such as the recently launched On-Demand feature, which allows consumers to use the pay-in-four option without a subscription.
Sezzle’s guidance for 2024 and 2025 reflects the company’s confidence in its ability to sustain its growth momentum. For 2024, the company has raised its guidance to include the estimated impact of the partnership with WebBank. Sezzle now expects revenue growth of 71.3% year-over-year, adjusted net income of $17.3 million (representing a 24.7% adjusted net income margin), and adjusted earnings per share (EPS) of $9.80.
Looking ahead to 2025, Sezzle has provided initial guidance of adjusted EPS growth of over 20% compared to 2024. This EPS growth is expected to be achieved despite a roughly 20% tax headwind in 2025. The company’s updated guidance incorporates the benefits of the WebBank partnership as well as the strong Q3 2024 performance.
The company’s focus on product innovation, consumer experience, and strategic partnerships has positioned Sezzle as a leader in the buy-now, pay-later industry. As the company continues to execute on its bold vision, investors will be closely watching Sezzle’s ability to maintain its impressive growth trajectory and profitability.
Risks and Challenges
While Sezzle has demonstrated impressive growth and financial performance, the company faces several risks and challenges that investors should consider.
One key risk is the highly competitive nature of the buy-now, pay-later industry, with established players and new entrants vying for market share. Sezzle’s ability to maintain its competitive edge and continue to attract and retain both consumers and merchants will be crucial.
The company’s reliance on consumer spending patterns and macroeconomic conditions also poses a risk, as any downturn in the economy or shifts in consumer behavior could impact Sezzle’s performance.
Additionally, Sezzle operates in a highly regulated industry, and changes in consumer finance and protection regulations, both domestically and internationally, could have a significant impact on the company’s operations and compliance costs.
The company’s growth strategy, which includes product expansions and geographic expansion, also carries execution risks that Sezzle must navigate effectively to sustain its momentum.
Industry Trends
The buy now, pay later (BNPL) industry is expected to continue its rapid growth, with a projected compound annual growth rate (CAGR) of approximately 20% over the next few years. This growth is driven by increasing consumer adoption of alternative payment methods and the expansion of BNPL services across various retail sectors.
As the industry matures, there is likely to be increased regulatory scrutiny and potential consolidation among players. Sezzle’s ability to navigate these industry trends while maintaining its growth and profitability will be crucial for its long-term success.
Conclusion
Sezzle has carved out a compelling position in the buy-now, pay-later industry, leveraging its innovative product offerings, strategic partnerships, and focus on the next generation of consumers. The company’s impressive financial performance, with record revenue growth and profitability, underscores its ability to execute on its bold vision.
As Sezzle continues to build upon its strong foundation and explore new growth avenues, investors will be closely monitoring the company’s ability to maintain its competitive edge, navigate regulatory changes, and capitalize on the evolving consumer landscape. With a clear strategic direction and a commitment to empowering its stakeholders, Sezzle appears well-positioned to deliver long-term value for its shareholders.
The company’s focus on sustainable growth, as evidenced by its improving profitability metrics and strong cash flow generation, provides a solid foundation for future expansion. As Sezzle continues to innovate and adapt to changing market conditions, it remains a company to watch in the dynamic and rapidly evolving fintech landscape.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.