SEZL - NASDAQ

Good afternoon, and welcome to Sezzle's first quarter 2026 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Charlie Youakim, CEO and Executive Chairman of Sezzle. Please go ahead.

Thank you, good afternoon, and welcome to Sezzle's first quarter 2026 earnings call. I'm Charlie Youakim, CEO and Executive Chairman of Sezzle. I'm joined today by our CFO, Lee Brading, and my co-founder and company President, Paul Paradis. 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. To retrieve the documents, please go to the investor relations section of the website. Please be advised of the cautionary note on forward-looking statements and the reconciliation of GAAP to non-GAAP measures included in the presentation, which also covers our statements on today's call. Before diving into the quarter, I want to start by touching on the big picture for 2026. We believe it is going to be an exciting year for Sezzle.

2025 was about enhancing our current consumer ecosystem. We improved the app experience, expanded engagement features, leaned back into higher-value consumers, and continue to give our users more reasons to come back to Sezzle. In 2026, we are pushing that strategy further. We are moving beyond being a product consumers think about only at checkout. Our ambition is to serve our consumers more broadly in their everyday lives and in the way they manage everyday spending. That means continuing to build around payments, but also expanding into areas like deposit accounts, card products, enhanced lending options, our recently launched Sezzle Mobile Plan, and more. The goal is simple. Create more value for the consumer, create more reasons to engage with Sezzle, and over time, make Sezzle a critical part of our consumers' daily lives. The strategy is working.

In the first quarter, we delivered strong growth, strong profitability, and improved engagement across the platform. We are raising our full-year guidance as a result. We are still very early in what Sezzle can become for the value-focused consumer. With that, let's dive in. The first quarter followed a similar and important pattern to the first quarter of last year. Better than expected credit performance helped drive strong margins and bottom line results. The strength in repayment trends also gave confidence to approve more volume while staying disciplined on risk, helping drive GMV that nearly matched the fourth quarter holiday period. We also saw the benefits of the investments we made throughout 2025 to create a more engaging product ecosystem.

Average quarterly purchase frequency increased by a full purchase across the consumer base, reaching 7.1 times in the quarter compared to 6.1 times in the first quarter of last year. That's a meaningful increase. It tells us our consumers are coming back to Sezzle more often and finding more ways to use us. Those factors helped drive the results you see on slide 3. GMV grew 37.3% year-over-year. Total revenue grew 29.2%. Our gross margins reached 74% of total revenue. We also generated $51.3 million of net income, representing a 37.9% profit margin and $71.1 million of adjusted EBITDA, representing a 52.5% adjusted EBITDA margin.

Given the strength of the 1st quarter and the growing engagement we're seeing across the platform, we are increasing our full year 2026 guidance across the board. We are raising total revenue growth guidance from 25% to 30% to a new range of 30%-35%. We are also increasing adjusted net income guidance by $10 million to $180 million and raising adjusted EPS guidance to $5.10 from $4.70 with some benefit from repurchase activity in the 1st quarter. We will provide more detail on guidance later in the call, but overall, this reflects our confidence in the momentum of the business.

A key factor in the recent growth of our business has been the payoff of our reinvestment and refocus on our subscribers, our highest LTV users on the platform, which you'll see depicted on slide 4. Our investments continue to pay off in the first quarter, with total subscribers increasing by 44,000 to 714,000. The overall total mods sequential decrease is due to the decrease in monthly on-demand users. A drop which reflects the seasonality of our platform from the busy holiday shopping period to the lower activity we see in the quarter after, along with the de-emphasis or a renewed focus on our subscribers. Turning to slide 5. Much of that subscriber momentum traces back to the continued investment we are making in marketing.

Since we began leaning harder into this effort in late 2024, we have tested a number of campaigns, funnels, and pathways to reach new consumers. Like most things at Sezzle, there's been trial and error along the way, but I think it's clear that we are starting to catch our stride in finding the most effective ways to win subscribers and drive greater engagement across the consumer base. The best part is that we have been able to push spending higher while still maintaining attractive returns. Marketing spend increased again in the first quarter, but we continue to see a payback period of less than 6 months. That gives us the confidence to keep investing where we are seeing performance. To be clear, the goal is not just to acquire any user at any cost.

The goal is to acquire and retain consumers with the highest lifetime values, the ones who transact more frequently, demonstrate stronger loyalty, and give us more opportunities to create value over time. In practice, that means subscribers, repeat users, and consumers who engage across multiple parts of the Sezzle ecosystem. The Earn tab is a great example of how our product and marketing strategies reinforce each other. Since launching in June 2025, the Earn tab has generated 4.8 million visits. Consumers show a 55% increase in BNPL conversion within 30 days after their first Earn tab activity. This is exactly the type of engagement loop we want to build. That brings us to slide 6. Pay in 4 has been the foundation of the business, but consumers are asking for more. More utility and more ways to use Sezzle beyond a single checkout moment.

In the first quarter and shortly after quarter end, we made progress on several fronts. We expanded short-term installment optionality with Pay in 5, launched an enhanced long-term lending capability across the entire BNPL product suite, introduced the virtual card in Canada with select integrated merchants, and launched the Sezzle Mobile plan on AT&T's network with an unlimited wireless plan starting at $29.99 for Sezzle Anywhere members. Each of these products has slightly different use cases, but the strategic theme is the same. Expand what a Sezzle relationship can do for the consumer. Turning to the next slide, AI continues to be a major focus across Sezzle. We are not treating AI as a side project or a small productivity experiment. We are embedding it into how we build products, support consumers, analyze data, and operate the business.

On the consumer side, we recently launched our AI support chatbot, and it's already resolving approximately 60% to 70% of the chats without escalation. That improves speed for the consumer while allowing our support organization to handle greater volume with the same disciplined cost structure. We are also testing our AI shopping assistant, which is driving stronger click-to-order conversion and helping consumers find the right products with less friction. Internally, we're using AI everywhere in the company to improve efficiencies and automations. We're using it to help analyze chargebacks, improve business intelligence, increase support quality, improve access to company data, and speed up engineering workflows. Taken together, these efforts do three things. Improve the consumer experience, increase output across the company, and scale the business while keeping expense growth well below revenue growth. All of this points to a broader vision, which the next slide lays out.

Sezzle started with Pay in 4, but we are no longer just a Pay in 4 company. We are building an all-in-one services platform for the value-focused consumer. The strategic goal is to make Sezzle more useful in more moments. The more value we provide, the more reasons consumers have to come back. That drives engagement, supports retention, and strengthens the consumer relationship over time. We still have a lot ahead of us, including products like bank accounts and greater post-purchase split capabilities, among other ideations. Overall, the real test of this strategy is engagement. If the product ecosystem is working, we should see consumers using Sezzle more often across more merchants and across more use cases. That's exactly what we saw in the first quarter, as seen on slides 9 and 10.

In the first two boxes, mods and quarterly purchase frequency prove out the ROI across products and marketing. Even the sequential increase in quarterly purchase frequency, seen on slide 10, jumped to a whole new level, reaching a half purchase more than our busiest quarter of the year. To me, all of these metrics you see on slides 9 and 10 are a clear sign that we are moving in the right direction. We are still early, but the flywheel is getting stronger. With that, I'll turn it over to Lee.

Thanks, Charlie, and good evening to everyone joining us. I will start on slide 11. Before getting into the details, I want to highlight the seasonality in our business. From a revenue yield standpoint, which is simply total revenue divided by GMV, Q1 is typically the peak of a fiscal year, as some payments from Q4's holiday season spill over into Q1. The quarter is also typically the best performing quarter in terms of our provision for credit losses as a percentage of GMV. Because our consumers generally benefit from tax refunds at the start of the year, thus leading to better loss rates in Q1. As a result, Q1 is usually the best quarter in terms of margins. While we would love to just annualize a unit economic margin of 74%, we can't. If you look back to last year's results, you will recognize that dynamic.

Even though we had a tough year-over-year comp this quarter, you can see the strong momentum in our business as we reached all-time highs in adjusted EBITDA margin and total revenue, less transaction-related costs as a % of total revenue. As noted earlier by Charlie, our marketing spend more than doubled year-over-year in the quarter. Nonetheless, we were able to leverage non-transaction-related operating expenses by 30 basis points year-over-year. Top-line growth and leveraging our non-transaction-related OpEx combined with strong unit economics resulted in net income outpacing total revenue for the quarter.

For those playing the rule of 40 game at home, which we measure as revenue growth plus EBITDA margin, we exceeded a score of 80 in Q1. On slide 12, you can see the strong momentum in our business as Q1 GMV of $1.1 billion nearly surpassed Q4's holiday season GMV of $1.2 billion. Sequentially, our revenue yield rose to 12.2% from 11.2% due to seasonality, which I addressed in my earlier remarks. Year-over-year, however, revenue yield declined 80 basis points due to the mix in merchant and virtual card activity, plus a reduction in the number of consumer fees charged. Slides 13 through 15 dive into our unit economics, which are powering our bottom-line results. As a reminder, transaction-related costs is a non-GAAP measure that combines transaction expense, provision for credit losses, and net interest expense.

You might hear us refer to gross margin or net transaction margin, which is total revenue, less transaction-related costs. Let's jump to slide 14 and review the 3 cost components of transaction-related costs. Each of the 3 components had a favorable year-over-year move. Transaction expense, consisting mostly of payment processing costs, continues to experience the benefits of us driving consumer adoption toward lower cost payment channels such as ACH. Meanwhile, our provision for credit losses fell year-over-year because of the better-than-expected performance in the current year's portfolio as well as prior year vintages. Further, we are not seeing any unusual strains on the consumer, and as noted earlier, seasonally, this is our best quarter for provisioning for credit losses. The story is not simply about consumers doing better than expected. Our team continues to enhance their toolkit and decisioning.

Our underwriting team is exploring new data sources, accelerating model iterations, and utilizing new machine learning techniques and collections. All of these add up to improvements as we scrutinize every lever of our underwriting inputs. Lastly, net interest expense remained low at 0.3% of GMV. There is further room for improvement here as we move forward with refinancing our current credit facility, which matures next April. Slides 13 and 14 demonstrate our hyper-focus on unit economics and its components. It is evident how it all comes together on slide 15. We continue to find ways to improve our economic model and not sacrifice growth. We recognize the importance of profitability as it allows us to pursue strategic initiatives that will further propel the business.

As we have stated in the past, our goal is to drive our business and profitability with revenue less transaction-related costs in the 55%-65% range. Our hyper-focus on cost does not stop at the unit economic line. It extends to our non-transaction-related operating expenses too, as shown on slide 16. Even as we more than doubled marketing spend year-over-year, we continued to generate operating leverage across the business, particularly in personnel costs. While our team has grown, we have scaled thoughtfully and remain disciplined in where we add resources. Looking ahead, we expect to continue leveraging our operating expense base while still investing in the areas that are delivering attractive returns. We did incur minor costs related to our corporate strategic projects during the quarter. Our antitrust suit is currently ongoing and something we cannot elaborate further on.

We are making progress on the banking charter process and have moved beyond the discovery phase as we are now actively hiring executives and non-executive directors. We anticipate submitting our application mid-2026. We recognize this process is long and not guaranteed, but we believe it is an important strategic opportunity to pursue. Sezzle's significant momentum is evident in our bottom line results shown on slide 17. Driven by a healthy unit economic story and leveraging our non-transaction related OpEx, net income outpaced our top line growth. For the quarter, GAAP net income reached $51.3 million, representing a 37.9% profit margin. Adjusted net income was $50 million and adjusted EBITDA was $71.1 million, a 52.5% margin. Each of these reflects an all-time high for Sezzle.

Our liquidity remains strong as shown on slide 18 as we ended the quarter with $147.4 million in cash, including $26.9 million in restricted cash. In addition, we had $69 million in availability under our line of credit. Working capital did build relative to previous quarters due to the launch of Pay in 5 in January. As noted, we have plenty of liquidity. The strength of our liquidity and cash flow generation is further exemplified by us repurchasing $24.8 million worth of common stock during the quarter, which will be disclosed in our 10-Q that will be available tomorrow. On slide 19, we update our guidance. We are raising our guidance across the board.

We now expect revenue growth of 30%-35%, adjusted net income of $180 million, and adjusted net income per share of $5.10. Before passing the call over to the operator for Q&A, I want to remind investors of a few items. First, we target total revenue less transaction-related cost margin of 55%-65%. Within this margin calculation, we target a provision for credit losses in the 2.5%-3% of GMV range. Second, we expect to continue to leverage our non-transaction related OpEx as we anticipate growth in the top line to outpace our spending. Third, do not forget about the seasonality in our business that I discussed earlier in the call. Last, this guidance does not reflect any projections for new products currently in development.

With that, I would like to turn the call over to the operator for Q&A.

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're 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 two. At this time, we will pause momentarily to assemble our roster.

The first question comes from Mike Grondahl with Northland. Please go ahead.

Hey, guys. Congrats on the strong quarter in progress. I'm looking at slide 6, Pay in 5, virtual card in Canada, Sezzle Mobile and enhanced long-term lending. Charlie, if you had to project out a year or guess, what do you think is going to be the most important out of those 4? Or could you kind of rank them?

Yeah, I would say Pay in 5. I mean, just because it's already proven to have results for us. I know many of the people on the call are not our target customer, but our target customer, you know, middle America, value-seeking consumers, we surveyed, we asked, even though Pay in 5 seems like it's just an incremental change over Pay in 4, there was a big demand among our consumer base for that incremental change, and we've seen it in the implementation. The other product, virtual card in Canada, it's not quite fully launched. Our goal with that virtual card in Canada product is to get that to truly anywhere. You can see in the subscript it's closed-end at the moment.

As soon as that goes live, I would say that also has some pretty serious potential, but it's also in Canada, which is, you know, 10% of our volume. It's going to help us, but it's 10% of the potential volume. Sezzle Mobile plans, enhanced long-term lending, they're just really early. Sezzle Mobile plan, not really designed to drive revenue, gross margin, more designed to increase retention, deliver value to consumers. Financially not going to be delivering massive numbers, I think, at any point, for investors to look at. Enhanced long-term lending, that's always been, you know, more of a nice sidecar for us as a product. We've had that in our history. We're just making it better.

It's also never been a massive driver in results in terms of financial results, at least. A product some of our consumers do like. Yeah.

Got it. Maybe just a question on marketing. What channels or where are you getting sort of the best returns there? What's kind of your outlook on marketing spend the rest of the year?

Well, you know, marketing spend, we still have the Timberwolves. We've got that deal going here, another year. By the way, go Timberwolves. I really hope they beat the Spurs tonight. Planning on it. We want to see them in the championship. Yeah, we've got the Timberwolves sponsorship going. That's more of like, you know, brand awareness type of play. The actual channels that deliver the results for us are advertising channels and, you know, it's really the usual suspects. Web ads, social media ads, in-app ad networks. We're pushing more into connected TV, you know, basically like the YouTubes of the world, you know, connecting to those ads.

Basically just testing across the board and, you know, wherever we see better results, we just keep on pumping a little bit more. That's why if you look at our results, you can basically see like just we keep on feathering on the marketing spend as the results keep on playing out.

Yeah, that's fair. That chart's helpful. Okay. Hey, thank you.

Hey, Mike. I'll just add a little more color too on that marketing spend. If you look from a, you know, year-over-year in absolute terms, Mike, it's definitely up. If you think about it also looking as a % of our revenue, you know, it's fairly reasonable and actually slightly lower than where it was if you look at Q2 last year. We do have the ability to leverage that spend.

Perfect. Okay. Thank you.

The next question comes from Kyle Peterson with Needham. Please go ahead.

Great. Good afternoon, guys. Thanks for taking the questions and really nice results. I want to start out on, you know, the credit costs. You know, appreciate the commentary and reminders and the seasonality, but I guess just looking at it, the losses, the % of GMV were still, you know, better than expected and down year-over-year. I guess, like, how should we think about some of the puts and takes and what your expectations are of getting back to that 2.5-3.5 range, especially as like Pay in 5 and some of these other products scale? Just want to see like what's conservative versus mix and, you know, if there's some potential upside to that number.

Thanks. Thanks, Kyle. Thanks for the question. I'll let Lee follow up if I'm, you know Lee, if you think I missed anything here. You know, part of the part of the thing to consider when we look at our quarterly results is part of the result is actually reconciliation of the because it's a provision, it's reconciliation of the prior quarter. Every quarter that we post is an estimation of what the loans for that quarter will be in terms of their estimated loss rates. You know, we basically had some, you'd call overestimation in prior quarter that that leaks in or underestimations. In this case, we had overestimation leaked in the first quarter, affecting that a little bit to the downside.

Always, I think, trend lines in the provision are a really good idea and because of the fact that we have to estimate. It usually is 2 quarters worth. Once we've got first quarter posted, it's basically washed out fourth quarter estimations. That's always something to consider. We have seasonality. I think we're still spot You know, the plan is still to see, you know, 2.5% to 3% for the provision for the year. Part of that is because we're expanding our marketing spend. Marketing spend increases new users.

New users have higher provisions. I would say Pay in 5, one of the trade-offs with Pay in 5 is that it does just logically have a slightly higher provision inherent to the idea. The way we've designed the product mix, we think we account for that in terms of like a matching principle on potentially, you know, the fees that are collected from some of the failures. It almost like financially plays out as a wash. Where it doesn't play out as a wash is it could potentially increase provision a bit. I think we're comfortable with what we projected. You know, every time we provision, it's actual provision and actual pure estimation. Again, estimations are almost 100% guaranteed to be incorrect one way or the other. I don't know, Lee Brading, anything to add?

I'll just reemphasize what you said. I think, yeah, Q1 is, I don't want to say anomaly, but it is, you know, the easier or tougher comp, I guess, so to speak, from a standpoint of collections and the provision standpoint. I get where you guys on the outside looking in, looking at the challenge going, "Wow, it's such a great quarter. Would love to annualize this." You know, as the year progresses, we get a little more aggressive too, from the new, as Charlie Youakim mentioned, bringing in new users. And not to mention that Pay in 5 is just getting started, we would expect to have probably initially a little higher loss rates on that as well. I think we're very comfortable with our 2.5%-3%.

Okay, great. you know, that's really helpful color. As a follow-up, I wanted to ask about, you know, the partnership you guys have or announced with Pagaya. I guess from the sound of it, I guess, is this, you know, kind of a way that you guys can get into some more longer-term lending and, you know, how will, you know, this partnership scale and, you know, be funded? Like, are you guys contributing anything there? I guess if not, like, what's your kind of path to monetization as that scales?

Yeah, good question. You know, in terms of monetization, it's really just, you know, a take rate on the almost like an MDR. You know, we're not sharing in the risk on that product, although we're trying to help Pagaya with their results as much as possible because they're a partner of ours. But it's really just a, like a skim off the volume that goes through that comes to us for running the product through our platform. Then for the consumer value, I would say it's primarily to help the company win merchant deals.

That's primarily why we've got the product in there, because there are a number of merchants that have average order values that span a larger range than our core products core sweet spot, which is like, you know, more $100 or maybe $80-$200 for a sweet spot. And when a merchant has AOV that rise above that, like a general merchandiser, they want to see that you have the capability to help them on some bigger ticket items. By having this partnership, it helps our sales team win some more of those merchant deals. Our plans are to also mix this into some of our D2C products as well. That's more about just providing as much value as we can to our consumer through our product mix.

We like staying in the shorter term products, which is why we've always partnered on longer term products. We like the nature of our product and the terms, et cetera. Just all the financial metrics around it. We're very comfortable with it, and we think, you know, give that longer term product to people that specialize in it, and Pagaya is one of those partners.

Great. Thanks for all the color and nice quarter.

Thank you.

The next question comes from Hal Goetsch with B. Riley Securities. Please go ahead.

Hey. Thanks, guys. Could you give us some color on any, you know, middle market merchants, enterprise customers? Are you generally just seeing broad new merchants coming from subscribers who are taking their virtual cards and their Anywhere subscriptions to many more merchants? Could you give us any color on that?

Yeah, we're seeing, you know, basically a continued trend on the. I mean, our business is becoming more and more direct to consumer, more and more open loop. I think that's where the trend is in our entire industry, which I think actually mimics, you know, none of us are probably old enough to know the actual of what happened in the credit card industry. Basically, you know, from my understanding of reading back to the credit card industry days, you know, a lot of things started closed loop and then they moved to open loop. I think the BNPL space is gonna do the same thing. You know, we all started closed loop, slowly realizing customers love the product so much they want to use it everywhere, which leads to open loop.

I think what we're seeing is our consumers using us in more and more just general purpose locations, like more shopping, with grocery, more shopping with general merchandisers. We're seeing more and more and more of that, which matches that ideology or the want to use the product in more places. Our sales team is still out there, and we have new product, we have new services, new features that helps them land more enterprise merchants, because it's probably gonna take 5-10 years for this transition to open loop to completely play out. In the meantime, we can still deliver a lot of value to merchants on the spot.

I think, you know, if you look at the credit card industry, it's always stayed, there's always been some sort of closed loop aspect. You still have private label products out there with the credit card ecosystems. I think we'll continue to have the sales channel on merchant. We've got on-demand now, which can, you know, we can offer merchants that have thinner margins the ability to pass on some of the fees to consumer. That's helping us win some more deals. We've got the Pagaya launch that just occurred. That's gonna help the sales team win more deals. I think we're gonna have this as a part of our ecosystem and one that generates, you know, even more returns for us. It's, it's an area of the business we're gonna keep on growing.

It's probably not gonna be growing as fast as the D2C 'cause we're just seeing incredible growth on that right now.

Okay.

I would add too, Charlie, that we view merchants primarily as a customer acquisition channel. You know, as we've pushed more into marketing channels, as Charlie, you know, just mentioned on this call, social advertising, app store advertising, merchants are a great channel for us to acquire new customers in, that's why we're gonna continue selling into those merchants, but it's becoming a less important part of our overall business.

Terrific. On the marketing and advertising, you know, nice commitment to spending growth year-over-year and sequentially from Q1 of last year to Q4. Would you expect the level of dollar spending to move incrementally higher from here or flattish quarter-over-quarter? What are your thoughts on the spending commitment in marketing this year?

I think we expect it to continue to rise quarter on quarter because the team is finding more and more places to place ads. Our mandate to them or our guidance to them is, if you can find places to get the return we're looking for, we want you to place the ads. Their job is to go out hunting for more and more places to place the ads where they can get the return. If they can do it, we're telling them to do it.

Excellent. The last question from me. Can you just give us your thoughts on the macro? You know, you serve a value-focused customer. You've had a pretty good amount of narrative in the news about affordability over the last six months and now this gas price spike. Just wanna get your thoughts on what you're seeing real time in the business.

Yeah. You know, in terms of our customer base, You know, people have asked us about like macro trends. Do you guys see anything? I don't. The only thing we've ever seen in our history that I can call out in our numbers where I really have seen something is COVID, both the spike down with closures and the spike up once people got stimulus checks. Outside of that, we really don't pick up anything. I, you know, it seems like our customers are perfectly healthy to us when we look at the numbers. We're not seeing anything now. I, you know, I know people have brought that concern about like, you know, gas prices that really hits mid- to low-income consumers more.

You know, maybe the mid to low income consumer just works a bit more, which is natural. You know, if you realize you're pinched a little bit, you gotta go out there and work a little bit more. I don't know. I'm just postulating. We're just not seeing anything.

All right. Terrific. Thanks a lot. Good job, guys.

Thanks.

The next question comes from Rayna Kumar with Oppenheimer. Please go ahead.

Hi. Good evening. This is Anthony

Pay in 5 is included now because it's part of our existing product mix. Sezzle Mobile long-term just launched, that's not in anything we're projecting at this point. I think, you know, we are seeing some really nice momentum in subscriber growth. You know, you've seen the, as we reported on demand down quarter-over-quarter. Some of that is, a lot of that is holiday, some of that is also our renewed emphasis on subscribers, we really like to focus on subscribers. We think it builds a, you know, rolling snowball, which helps us. I think that probably is the, you know, primary reasons behind it. I don't know, Lee, anything else to add to that?

Yeah, no, I think that's spot on. The only other thing I would add is just a little bit of the choppiness maybe or seasonality with our revenue yield when we look at versus GMV. I think if you look, this quarter was a tougher comp. I think next quarter we'll have an easier comp from a revenue yield standpoint. I think you'll see a smoothing out or a more consistent from Q3, Q4, similar with Q1. In the first half of last year, we had some movement within our revenue side. And Duxie, you saw the spike last year, and we were down a little bit this year, but I think you'll get the smoothing out as we go through the quarters.

Thanks. That's helpful. I guess as a follow-up, I'm just looking at slide 8, and there's a lot of new products that are on your roadmap here. I mean, can you help us think about kind of a timeline for you to become this kind of all-in-one services platform? Secondarily, like are you utilizing, you know, AI at all to help you develop any of these financial tools to kind of gain a little bit more operating leverage in your business? Thanks.

I think, you know, based on the list of items we see here, this is probably all of these items completed, launched, and scaling by the end of 2027, the ones we have outlined here. You know, I don't know if we ever will say the end is there in terms of innovation. We've always believed that we wanna keep on innovating. I think we'll have a really nice platform by the end of 2027 in terms of like, you know, much more fully featured in terms of offerings to the consumer. We'll definitely have the deposit accounts in place by then. You know, secured credit card I could see potentially in that time period, you know, we'll see how things play out.

You know, every time we announce products and send stuff, you know, product roadmap. We always have, you know, new conversations. It, you know, that's why I'm hesitant as I say probably because, well, you know, there might be things that come up in the meantime that we think are more important for the consumer. I think over the next couple of years, I think we'll, end of 2027, we'll have some, a really nice product mix. It's really interesting, your question on AI. Definitely. I mean, we have had some products thus far where the vast majority of the product development has been AI-driven.

I remember our product team on one of their internal calls calling out, you know, this product thus far has been 100% developed with the assistance of AI, you know, from the visualization, the screens, the flows, the plan flows to the code. You know, upwards of 80% of our code is now being developed by AI with reviewed by our team. It's incredible. Our goal, the way we view it internally is we're asking our team just to be more productive, you know. I know we see out there in the markets, like, I think it's Some people talk about using AI to cost cut. I think it's just such a half-glass-empty way to look at things. I think our view is AI makes you a super-powered person. Use it.

Use it to increase our product development. Instead of launching one product that's core to lift, launch three. Speed up. Allow us to be a team that looks like 4,000 instead of, you know, 500 that we have with us. That's the way we utilize it. We're injecting it everywhere. We're basically mandating it everywhere. If you're a leader in the company that doesn't want to embrace AI, you're probably not gonna be in the company much longer. That's not an issue. We already have the embrace. I'm just saying, like, that's how much we believe in it. We believe it's a necessary product that you have to use.

Great. Thanks for the color.

The next question comes from Ryan Tomasello with KBW. Please go ahead.

Thanks, everyone. In terms of the product pipeline, I think you've previously alluded to a cash advance product that's in the works. I was hoping you can give us an update on how that rollout was progressing. Anything you can share on engagement pricing and also on the underwriting. Particularly on the latter with underwriting, Charlie Youakim, curious if you envision an opportunity to push more into direct cash flow linked underwriting to support that rollout. You know, if that could eventually, you know, support the broader kind of BNPL core credit product as well. Thanks.

Yeah. We're testing a lot of different We've seen some variations of our cash flow management product. We've seen great engagement, which is nice. We definitely can tell the customer likes the product. Because of the regulatory environment we're in, we're very cautious about how we launch the product as well. The current plan is to have the product more mimic what we do with BNPL. It'd be like almost a Pay in 4, Pay in 5 to yourself, kind of a cash flow product. Probably limited to subscribers only is the idea, as a tool or another benefit for those subscribers. We think it'll be favorably viewed by the consumer base because of the pricing to that product. It'd probably be like one of the more lower cost cash management tools available to a consumer.

Albeit they have to be, you know, 1 of our subscribers, but, you know, that's the whole point. We wanna, we wanna create more and more tooling that provides more and more value to get consumers into subscription ecosystem and keep them there. That's what we've seen from some of our testing. We've done some small scale testing. It increases engagement, it increases retention, increases happiness. So it's 1 of those products. We plan to launch in here in the next, yeah, few months. So probably in the next 3 months, we'll have that product out in the market in a more serious way.

Great. Sticking on the product pipeline topic with the checking product, can you just talk about the timing there and how you envision going to market with the product, any carrots that you might offer to help drive uptake, and then just elaborating on, like, the marketing investment that might be needed to support awareness and adoption. Thanks.

Yeah. We That's another product, you know, coming in the next few months as well. You know, definitely by end of third quarter would be our estimation. In terms of, like, the actual, like, plan pitch around the product and the plan, planned integrations, nothing yet really concrete or to speak of at this time. The whole point is we want Sezzle to be the one-stop shop for the consumer, and we'll try to figure out, you know, give and takes or, you know, customer you give us X, we'll give you Y kind of arrangements. We think that that's the way we kinda like to, you know, mix our value to the customer if, you know, provide this value to the customer and if they join up for X, Y, or

We don't have those nailed down, but we'll try to figure out some way to build it into the fold and create a compelling reason for consumers to join it. By doing so, I think we're seeing deposit accounts or thinking deposit accounts are a great way to increase retention.

Great. Thank you, guys.

The next question comes from Huang Lin with TD Cowen. Please go ahead.

Thank you. Congratulations on the quarter. I want to ask on the revenue less transaction cost margin, since you guys have been doing so well in that over the past couple of years. It looks like it just keeps going up.

If I look at 1Q this year, I think it's up by four points versus last year. I mean, can you talk about, you know, is there something that is making your margin, I guess, structurally higher, you know, year-over-year and, you know, maybe can you talk about some of the levers that you can continue to pull to further improve on the margin?

Yeah. I'll answer to the, you know, some of that and pass off to Lee for more detail. You know, some of these things on the COGS side, they're just helped by scale. Transaction expense, as we have more scale, we get better payment processing rates. We're also, you know, in some ways, incentivizing consumers to move over to ACH in some ways versus card processing. That's been helping our transaction expense, but scale always helps there. Net interest expense, as we get scale, we have lower costs of financing available to us. We're also packing on cash. You know, we're a cash-generative business, we don't have to necessarily borrow as much from our line of credit, which also reduces the net interest expense. We've had some of that benefit.

Provision, you know, probably a bit of a scale benefit there as well. You know, we find repeat customers have better loss rates. As you scale up, you have more repeat customers generally. Of course, I always think it's like a good problem if we can scale growth of users in a big way. That one, you know, if we hit some of our goals, it might go the other direction if we are able to, you know, break through some finding that helps us scale users even faster. Generally, steady state, that also goes down because of our repeat user engagement. On the top side, I think the fact that you have subscription products as the driver, that tends to create a rolling benefit for the company on the top line.

I think that's probably why you're seeing that. That, as, you know, as Lee mentioned a couple times, just also wanna reiterate for listeners that, the 74% gross margin that we basically posted here in the first quarter, don't annualize it. We wanna make sure investors know the fourth quarter, first quarter, there's some seasonal elements to that. I'll just explain it again because I think I wanna make sure people understand it. The seasonal elements are mainly on the revenue side, but a little bit on the cost side with provision. As volume slows, the way we recognize costs, maybe that's the best way to say it. The way we recognize costs, we do it through provision.

Provision, we estimate right away in the quarter what the provision will be. If you have a quarter like fourth quarter where volume's typically higher, steady state because of holidays, we're taking all the costs and putting them into that fourth quarter. The revenues or the what will be likely revenues are recognized on the payments which come into the first quarter. You have a typically higher volume quarter, the fourth quarter due to seasonality, with payments rolling in, which they're where the revenue is recognized into the first quarter. We get more revenue coming into the first quarter from the fourth quarter on a lower volume, seasonally adjusted. We almost topped our fourth quarter volume, which speaks to the growth of the company, but we still had lower volume in the first quarter than we did the fourth quarter.

You'll have a generally higher revenue take rate in the first quarter as well. We wanted that which increases your gross margin in the quarter. We wanna make sure people, like, keep that into consideration, as they're looking at, you know, what happened this quarter. I don't know, Lee, anything else to add?

Yeah. Just emphasize that we generally, you know, talked about being a 55%-65% area from a gross margin or revenue less transaction-related costs. We've definitely been trending on the higher end of that, you know, the 60-65, I would say. I think Charlie hit on it, but just to emphasize kinda the 3 key areas is, you know, on the transaction side or processing side, we have seen a move to more ACH, we've been able to emphasize that. That's obviously gonna help us there. Also interest expense, I do expect, you know, us to get, as I mentioned in my comments on the line of credit side, you get some improvements there as we progress through this year as we refinance our facility. That's to come, I expect that to happen.

On the provision, it's a little bit of the wild card, you know that it can be a big swing factor as you saw the year-over-year improvement there this quarter, which also drove that, you know, outperformance if you looked on a year-over-year basis. We aren't necessarily booking in that same kind of outperformance going forward, that's something else to be aware of.

Got it. Maybe if I can throw one more in on the bank charter. I think, I mean, one of the benefit is that it could help you guys launch, you know, more products that you guys currently currently cannot launch with a bank partner. Can you talk about the kind of products that, you know, that your own bank charter would, you know, allow you guys to launch, you know, that you currently may not be able to do so with your bank partner? Thank you.

Yeah. Not necessarily. You could actually, in today's environment with banking and service partnerships, you can pretty much launch every type of product out in the financial services world. The main reasons for the bank partnership, I would say more defense from a regulatory perspective. We just think that, you know, it basically solidifies what we're doing. You know, there are some regulators out there in some states that are chopping away at the bank partnership model, sadly, 'cause it's a great model. We're well aware of it. Getting to the ILC or to becoming a bank helps you basically push further away from that potential of that becoming an issue. It does move a variable cost stream to a fixed cost stream.

You know, cause you basically have your fixed cost of your own bank and your staff, versus the arrangement we have with WebBank currently, where it's more of a variable cost percentage of our volume. Over time, as our volumes grow, you can move to a fixed cost structure, you're gonna save. It's more savings, more regulatory defensibility. Maybe there is some, like, benefit on the product side. Maybe you can launch things faster because your bank is more hyper-focused on what you're doing. When you're talking to your regulator, you don't have, you know, 19 other partners, like banking-as-a-service partners, and they have to talk to the regulator about all of them. You just talk to the regulator about what you're doing.

I could see it being faster potentially, but not necessarily limiting on what you can build.

Got it. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Charlie Youakim for any closing remarks.

Thank you, operator. I'd like to leave with something Charlie Munger said that stuck with me. He said, "I think you should try to make your money in this world by selling other people things that are good for them." I think that's a fair description of what we're doing at Sezzle. We're a company that thinks about this all the time. We believe our core products are much safer and less costly than existing financial products. We also go out of our way to find ways to help our consumers save money. We're helping our customers, and that feels good. The growth, the margins, and the cash generation we walked through today are the downstream effects of getting that right. Customers who improve their financial lives come back. They refer their friends, they graduate up the platform through Sezzle Up. That's the flywheel.

It not only spins with the alignment, and it only spins with the alignment if it with the consumer is real. We've got a long way to go, and the environment around us is dynamic, and we're going to keep on earning our place one consumer at a time. Finally, a big thank you to the team for another quarter of disciplined execution. Thank you to our shareholders for the trust you continue to place in us. We'll talk to you next quarter. Thanks.