Propel Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 7 speakers on the call.

Operator

Good morning, everyone. Welcome to Propel Holdings Second Quarter 2024 Financial Results Conference Call. As a reminder, this conference call is being recorded. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

Instructions will be provided at that time for research analysts to queue up for questions. I will now turn the call over to Devon Jelani, Propel's Senior Director, Capital Markets and Investor Relations. Please go ahead, Devon.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us today. PROPEL's Q2 2024 financial results were released yesterday after market close. The press release, financial statements and MD and A are available on SEDAR Plus as well as on the company's website, propelholdings.com. Before we begin, I would like to remind all participants that our statements and comments today may include forward looking statements within the meaning of applicable securities laws.

Speaker 1

The risks and considerations regarding forward looking statements can be found in our Q2 2024 MD and A and Annual Information Form for the year ended December 31, 2023, both of which are available on SEDAR Plus. Additionally, during the call, we may refer to non IFRS measures. Participants are advised to review the section entitled Non IFRS Financial Measures and Industry Metrics in the company's Q2 2024

Speaker 2

MD and

Speaker 1

A for definitions of our non IFRS measures and the reconciliation of these measures to the most comparable IFRS measure. Lastly, all dollar amounts referenced during the call are in newest dollars unless otherwise noted. I'm joined on the call today by Clive Kinross, Founder and Chief Executive Officer and Sheldon Siedakoski, Founder and Chief Financial Officer. Clive will provide an update on our existing operations and overall economic environment and will then provide an overview of our record future results before Sheldon covers our financials in more detail. Before we open the call up to questions, Clive will provide an update on Peveld's strategy and growth initiatives for the remainder of 2024.

Speaker 1

With that, I will now pass the call over to Clive.

Speaker 2

Thank you, Devin, and welcome to our Q2 conference call. Building on our strong start to the year, we achieved another record of another quarter of record results, including record total originations funded, revenue, adjusted CLAB, adjusted EBITDA, adjusted net income and ending CLAB. We also achieved a major generating $100,000,000 in quarterly revenues for the first time. Carrying over from our strong Q1, we continue to experience robust demand leading to record total originations funded of $144,000,000 which increased by 40% over Q2 2023. We and our bank partners were able to originate record new and existing customer volume even while maintaining a prudent approach to underwriting.

Speaker 2

As we have for the past several quarters, we and our bank partners made the strategic decision to originate more volume in line of continued strong demand and credit performance. Our ability to expand credit access while maintaining strong credit performance is largely attributable to our AI powered technology. In Q2, we had record total originations funded of $144,000,000 with net income of $11,100,000 and record adjusted net income of $15,600,000 While we had anticipated strong demand coming out of Q1, consumer applications were higher than anticipated across the whole loan portfolio. This was driven by multiple factors. 1, consumers continue to face a tightened credit market.

Speaker 2

The Federal Reserve survey of senior loan officers found in April that a significant number of banks were increasing minimum credit score requirements for credit card loans, with many also doing so for order loans and other consumer loans. Looking at our own data, we observed an increase in higher credit quality consumers coming to our platform. 2nd, while our consumers remain resilient and have experienced real wage growth over the past few years, many continue to operate in an inflationary environment where they need credits. We have observed, for example, that the number of consumers unable to afford a $400 emergency expense remains in the high 30% range for the past several years. In this environment, it is critical to have best in class underwriting capabilities, technology and operations that allows us to expand credit access while delivering strong credit performance.

Speaker 2

As we have spoken about previously, our AI powered underwriting gives us the ability to evaluate upwards of 5,000 variables as opposed to a handful that traditional credit scores consider. This ultimately allows us to have a more nuanced complete picture of a consumer's financial well-being, which in turn allows us and our bank partners to offer credits to more consumers while managing credit risk. Looking at the current macroeconomic backdrop, the U. S. Continues to experience low unemployment levels and wage growth continues to outpace inflation even with a slight uptick of unemployment in July.

Speaker 2

We are further encouraged by the recent increase in U. S. Consumer confidence in July and the likelihood that interest rates in the U. S. May potentially start decreasing as early as this quarter.

Speaker 2

New Mile in Canada, while still strong historically, there are some differences in the broader economy compared to the U. S. Canada's unemployment levels increased slightly to 6.4% in June compared to the U. S. Is 4.3% in July.

Speaker 2

Furthermore, we have observed that Canadian consumers are cutting back on spending as demonstrated by decline in retail sales in May. However, we expect the 2 rate cuts from the Bank of Canada may have some beneficial impact on our customers. Notwithstanding the macroeconomic backdrop, we have experienced growth in Fora with 43% growth in CLab from Q1 of this year to Q2, resulting in record revenues. At the same time, we're also experiencing continued strong credit performance as a result of the ongoing refinements of our AI underwriting models. With respect to the Canadian regulatory environment, the government announced that the reduction to the maximum liable rate of interest would come into effect January 1, 2025.

Speaker 2

We had previously anticipated the reduction would come into effect in July of this year and had built that assumption into our forecast. This implementation timeline will not have a material impact to our 2024 guidance and may potentially have a slight positive impact. In advance of the regulatory change, we have continued to expand our marketing and consumer acquisition strategies, while optimizing and refining our AI models for the sub-thirty 5 percent APR markets. We are also working on securing new partnerships and opportunities to further accelerate our growth. We remain incredibly confident in our ability to grow Fora into the leading online lender to the underserved consumer in Canada.

Speaker 2

Turning to our lending as a service program, we continue to experience strong growth. Since its launch, we have grown the program across all key measures with the addition of new states and purchases. This quarter, we achieved record revenue and originations. This program is laying a foundation for our business as we serve a broader range of underserved consumers across the credit spectrum in more states, including our first time servicing the sub-thirty 6 percent APR consumer. Looking ahead and recognizing the strong demand across our business, we upsized our Credit First facility ahead of plan from $250,000,000 to $330,000,000 This upsize will fuel the continuing expansion of the company's largest portfolio and support PROPEL's overall growth.

Speaker 2

Now on to some highlights for the quarter. PROPEL has once again delivered record results for the quarter. As compared to Q2 2023, revenue increased by 49% to $106,800,000 and our C lab increased by 44 percent to $392,000,000 In Q2, PROPEL also delivered net income of $11,100,000 representing 95% growth over Q2 2023 and record adjusted net income of $15,600,000 representing an increase of 82% over Q2 2023. This translated into diluted EPS of $0.30 and record diluted adjusted EPS of $0.42 In Canadian dollars, our Q2 2024 EPS is $0.41 and diluted adjusted EPS is $0.57 Lastly, return on equity and adjusted return on equity increased on an annualized basis to 38% 54% respectively, compared to 26% and 39% respectively in Q2 2023. All of these metrics represent significant increases from the prior year, which Sheldon will elaborate on.

Speaker 2

We're incredibly proud of what we've achieved. Our record performance this quarter coupled with our strong profitability on both an IFRS and an adjusted basis is a testament to our team, technology and the scalability and operating leverage in our business model. Lastly, given our continued strong results and solid capitalization, I'm pleased to announce that our Board of Directors has approved another increase to our annual dividend from $0.52 per share to $0.56 per share, representing an 8% increase in our Q2 dividend. We have increased our dividend every quarter this year and this is our 5th dividend increase since the beginning of 2023. With that, I will now pass the call over to Shaul.

Speaker 3

Thank you, Clive, and good morning, everyone. We are proud to deliver another quarter of record results while continuing to grow the business significantly on a profitable basis. Similar to Q1, we continue to observe record consumer demand, which led to record originations for both new and existing customers. The strong demand was higher than anticipated across our product portfolio and drove a 36% increase in year over year new customer originations and 40% growth in year over year total originations funded. The record new and existing customer originations resulted in record Q2 total originations funded of $144,000,000 Consistent with our strategy in recent quarters and given the ongoing strong credit performance in the portfolio, we and our bank partners continued to originate a high proportion of new customers through both the CreditFresh and MoneyKey brands and continued to ramp up for us.

Speaker 3

The strong quarterly originations help drive our loans and advances receivable balance as well as our record ending CLabs at $392,000,000 for the quarter end as compared to $273,000,000 last year, representing a 44% increase. As Clive mentioned, we experienced strong growth from our Canadian operations with Fora generating record originations and revenue in Q2 2024. Fora delivered significant year over year growth and also demonstrated strong origination and revenue growth on a sequential basis from Q1. This was driven by Fora's ending CLab growing by 43% quarter over quarter from Q1. Furthermore, our lending as a service program continues to ramp up as we onboard new purchasers and gradually expand originations.

Speaker 3

Q2 represented another quarter of increasing revenue for the program and hitting all key milestones and objectives with both the Pathword and CreditFresh programs performing in line with expectations. We remain confident that both Fora and our lending as a service program will continue to have a more meaningful impact to the company's results through the back half of 2024 and beyond. In addition to the record loans and advances receivable balance and ending CLAP, we experienced an increased annualized revenue yield, which together drove our record revenues of $106,800,000 for Q2, representing 49% growth over Q2 2023. As Clive mentioned, this was our first quarter generating more than CAD100 1,000,000 of revenue and we're incredibly proud of this achievement. The annualized revenue yield was 115% in Q2, an increase from 110% in the prior year.

Speaker 3

The increase was driven by similar factors as discussed on prior calls, including firstly, the continued growth of new customer originations over the preceding quarters leading into and during Q2. Secondly, an increase in origination volume and loan balances from the MoneyKey programs, which typically have a higher revenue yield than our other programs and an increase in origination volume from the higher yielding segments within the CreditFresh portfolio. And thirdly, the optimization over the course of 2023 of graduation criteria and processes as well as the various fee tiers on the CreditFresh program. These optimization efforts are having a meaningful impact in 2024. Turning to provisioning and charge offs.

Speaker 3

The provision for loan losses and other liabilities as a percentage of revenue decreased to 50% in Q2 from 51% in Q2 of last year. The year over year decrease is a result of firstly, ongoing strong credit performance driven by the effectiveness of our proprietary AI powered underwriting and our success in continuing to move up the credit spectrum. And secondly, the continued consumer resiliency in addition to wage growth keeping up with inflation. I would further note that the provision for loan losses and other liabilities as a percentage of revenue during the quarter was our best Q2 performance outside of 2020 2021. Periods impacted materially by COVID and the associated government relief support.

Speaker 3

We're very proud of our strong credit performance. We believe that the ability to grow our CLAB revenue and the overall new customer origination significantly during the quarter, while decreasing our provision percentage is a testament to our prudent and effective underwriting, our application of AI capabilities and our world class technology and processes. Together, these capabilities with our exceptional team are leading to the high credit quality and excellent results. With respect to net charge offs, our net charge offs as a percentage of CLab decreased to 11% in Q2 from 12% in Q2 last year. This decrease is a result of the same factors that drove down the provision for loan losses and is another key metric reflecting the higher credit quality portfolio composition.

Speaker 3

Our net charge offs as a percentage of C LAB is well within our target range for the loan portfolio and we believe we'll continue generating strong unit economics and drive expanding growth and profitability going forward. In Q2 2024, our net income increased to $11,100,000 from $5,700,000 in Q2 last year, while adjusted net income increased to a record $15,600,000 from $8,600,000 last year. Our net income year to date grew to 24 $200,000 and adjusted net income increased to $31,000,000 both representing records for a 6 month period. On an earnings per share basis, our diluted EPS increased to $0.30 in Q2 from $0.15 in Q2 last year, while our diluted adjusted EPS grew to a record $0.42 in Q2 from $0.23 in Q2 last year. Our diluted EPS year to date grew to $0.65 and diluted adjusted EPS year to date increased to $0.83 both representing records for a 6 month period.

Speaker 3

As a reminder, all these figures are expressed in U. S. Dollars. On a return on equity basis, our annualized ROE for Q2 was 38%, up from 26% in Q2 last year and our annualized adjusted ROE was 54% in Q2 2024, an increase from 39%. Both metrics demonstrate strong returns to our investors as well as our ability to efficiently utilize shareholders' capital.

Speaker 3

The growth in our earnings is primarily a result of the overall growth of our business, the lower provision for loan losses as a percentage of revenue, the inherent operating leverage in our business model and ongoing effective cost management, and finally, continued technology enhancements driving increased automation and efficiency in originations and loan servicing. In relation to this point in particular, our operating expense is not including acquisition and data expenses decreased to 15% of revenue for Q2 as compared to 17% in Q2 last year. We expect that the low growth in our loan book and revenue will continue to outpace the growth in our operating expenditures, including salaries, infrastructure and, thereby leading to ongoing margin expansion. With respect to acquisition and data costs, although new customer originations grew significantly in Q2 versus Q2 of last year, acquisition and data expenses decreased as a percentage of revenue to 12.3% in Q2 twenty twenty four from 13.1% in Q2 of 2023. As a reminder, we incur acquisition and data costs primarily on new customer originations, whereas originations to existing and return customers carry little to no cost.

Speaker 3

The ability to significantly expand our new customer originations while decreasing the expense as a percentage of revenue demonstrates the continued efficient management and overall operating leverage of the company. Our cost per funded origination of $0.091 in Q2 remained the same as last year. Furthermore, our cost per new customer dollar funded was $0.19 for Q2 2024. This level of spend per dollar funded is well within the acceptable range to achieve targeted profitability during a period of significant growth. Overall, our net income margin increased to 10% in Q2 from 8% in Q2 last year and the adjusted net income margin increased to 15% in Q2 twenty 4 from 12% in Q2 of last year.

Speaker 3

On a year to date basis, our net income margin increased to 12% for 2024 from 10% in 2023 and the adjusted net income margin increased to 15% for 2024 from 12% in 2023. Our margins continue to be impacted by the higher interest costs on our credit facilities due to the elevated interest rate environment. Our overall cost of debt, which includes interest and other credit facility associated fees decreased slightly to 13.4 percent in Q2 from 13.5% in the prior year. On a go forward basis, we expect that interest costs may start to decrease due to several potential reasons including, firstly, the Bank of Canada has already started to reduce interest rates, which positively impacts our Fora facility. Secondly, the Fora facility is starting to represent a higher proportion of our total debt utilization given the expansion of our Canadian operations.

Speaker 3

And thirdly, we expect the Federal Reserve may start decreasing rates. Given the floating rate and nature of our credit facilities, we expect that the reduction in interest rates will provide a tailwind to our profitability. Lastly, I'll provide an overview of Propel's financial position. At the end of Q2, we remained well capitalized with a strong liquidity position that continued executing on our growth plan. Furthermore, our debt capacity was enhanced a couple of weeks ago with the upsizing of our CreditFresh facility, increasing the capacity from $250,000,000 to $330,000,000 while also introducing new lenders to the syndicate.

Speaker 3

While we continue to be supported by large institutional lenders, the ability to add new banks to the syndicate is a testament to our strong fundamentals and performance. As a reminder, each of our credit facilities is supported by a syndicate of lenders ensuring that we have redundancy across our funding partners. Inclusive of this upside, the business has approximately $130,000,000 of undrawn capacity under our various credit facilities. Our debt to equity ratio was 2 times at the end of Q2 remaining at the same level as at the end of 2023 despite the significant growth in our ending C lab during Q2 of 2024. This is a result of the continued strong earnings and operating cash flow generated during the quarter.

Speaker 3

We believe that our strong financial position bolstered by additional lenders and capacity as well as our significant cash flow generating capability will be able to support the continued expansion of our existing programs, additional growth initiatives and to support our increased dividend. Before I turn the call back to Clive, I want to take a moment to congratulate my mentor and friend Clive on being a finalist for the Ernst and Young Entrepreneur of the Year Award. Having spent 13 years building a business alongside Clive, I've seen firsthand Clive's ability to build and inspire a team. We've been through the highs and lows of building a business together and through it all, Clive has been there to urge us to do more and to always do better. Propel would not be the made in Canada success story that we are today without Clyde's relentless drive, brilliant financial mind, his heart and incredible perseverance.

Speaker 3

As a result of his leadership, we are here today and are stronger than ever. This is a well deserved honor, Clive, and I'll be cheering for you in October when the winner is announced. I will now pass the call back over to Clive.

Speaker 2

Well, thank you, Sheldon. It sounds like you really meant that. We've had an outstanding first half of twenty twenty four. Looking ahead, the team and I are incredibly excited by what's to come. Well into our Q3, we continue to observe strong credit performance and record levels of demand across our portfolio.

Speaker 2

In the U. S, there remains an opportunity for significant growth. While there has been a lot of speculation on the effect of inflation, our consumers have remained resilient. They have experienced real wage growth and the labor market is still strong. We are confident in our ability to underwrite while providing world class service and that is why we are originating record volumes and meeting the demand head on.

Speaker 2

We and our bank partners anticipate the strong demand and credit performance to continue and to drive our growth in the U. S. For the back half of the year. In Canada, we are more determined than ever to become the leading digital lending business. While Canada is a smaller market than the U.

Speaker 2

S, the opportunity is substantial. The Canadian market has long been dominated by large financial institutions. However, we believe that is starting to shift. With open banking moving closer to reality, a growing number of fintechs are breaking through. With this as a backdrop, we are actively pursuing opportunities to accelerate Fora's growth even more and to capitalize on the changes in the regulatory landscape.

Speaker 2

Looking at our lending as a service program launched last year, we've seen consistent growth as we've expanded into new states and new consumer segments. This program will be a key pillar in supporting our mission of providing credit access to more consumers while driving expansion of our growth, profitability and return on equity. When I step back the story of this quarter is one of demand. It's easy to talk about demand in terms of total originations and revenues. But behind those numbers are millions of consumers who've been locked out of the mainstream financial system.

Speaker 2

This quarter, we closed in on nearly a 1000000 consumers served since we launched 13 years ago. Each one of these customers has their own story. I regularly talk to our customer service agents and what they tell me is that our customers are so relieved to have Propel there when they need it. But building financial opportunity for them doesn't end when they become customers. We're now up graduation on most of our products, which allows customers to graduate to better rates based on repayment history.

Speaker 2

Our goal is that customers leave us with better credit options than when they came to us. Lastly, I want to take a moment to talk about our team. As Sheldon mentioned, it's an honor to be a finalist in EMI's Entrepreneur of the Year. The recognition of the world class business we are building. And while I was the one nominated, any of my co founders, Sheldon or John could also have been nominated.

Speaker 2

Together along with the rest of our team, we have built PROPEL into a true Canadian success story. As I look at my fellow co founders today, it's amazing to see how far we have come with a few more gray hairs and lots of lessons learned. Through that journey, we've built an incredible amount of love, trust and respect with each other. We have always been bound together by a shared set of values and that continues today. I cannot imagine building this business without them or the rest of the team.

Speaker 2

I often say on these calls that we are just getting started and I mean it. A few weeks ago, we sat down for a midyear executive strategy session. It was a long day of meetings in a small boardroom in an already busy period for the team. As we do, we had an open and frank discussion on where we are going and how we are going to build PROPEL into the worldwide industry leader. At the end of the day, Sheldon turned to me eyes wide with excitement.

Speaker 2

We talked about how now after 13 years, the team has more energy, enthusiasm and excitement than ever. Even after years of working together and building this business, we are still excited to get to work and do more. This type of energy is rare and to me is what sets our company apart. We really want to build a world class business and aren't afraid to put the work in to get there. There is no doubt in my mind, we will continue to be one of North America's fastest growing FinTechs for many years to come.

Speaker 2

Looking ahead, we have been explicit that we want to become a global leader in building opportunities for underserved consumers and we will be. There are 100 of millions of consumers globally who should have access to credits, but have been locked out. We are committed to building a new world of financial opportunity for them. There is so much more to come. That concludes our prepared remarks.

Speaker 2

Operator, you may now open the line for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Matthew Lee of Canaccord Genuity. Please go ahead.

Speaker 4

Hey, morning guys and congrats on the nomination. I maybe wanted to start with a question on the medium term outlook. I mean, you've strung together 2 very good quarters now, EBITDA growth in the first half up 70%, collab nearly $400,000,000 Is there a particular reason why you've opted not to raise guidance on the back of these results? I assume it's just conservatism, but just want to make sure there's nothing in the back half of the year that maybe we're missing that could slow down loan or EBITDA growth?

Speaker 2

Morning, Matt. And first of all, thanks for the kind words. Much appreciated. And as you know, our business is seasonal with more of the growth typically in the back half of the year, Q3 and Q4. So when you look at our CLAB growth, that's a number you referenced.

Speaker 2

Our guidance was 25% to 35% growth for the year. And year to date, we're already at 42% growth. So we're significantly outpacing those numbers. And as I said, Q3 and Q4 are generally higher growth quarters for us. Certainly halfway through Q3, we continue to observe very strong demand.

Speaker 2

We continue to break originations records, order which is to say you being an incredibly smart guy, you could connect those dots for yourselves.

Speaker 4

Okay. Thanks. And then maybe on the new customers you're adding. So it does sound like your strategy of reaching higher yield customers is working really well, just given the improving yield. Any concerns on your end that those customers might face stress later on in the year given kind of uncertain economic conditions?

Speaker 4

And then can you maybe talk about the credit scores of those newer customers versus your current base just to help us get a bit of a flavor as to their credit quality?

Speaker 2

Yes. Just remember, Matt, we have a very quick feedback loop in terms of credit performance in our business. Our products tend to be shorter term in nature. So, it's not like we're originating April or May vintage only to be hurt by it kind of at some point in 2025 or 2026. We get that feedback loop quickly.

Speaker 2

The first key performance indicator would be our 1st payment default rates and the next would be the default rate for the payment thereafter. And I could tell you the reason we're really comfortable leading into the strong demand is because the performance has been excellent right across the portfolio, including what I would call some of these higher APR products. So once again, we're very comfortable. You could see that our provisions for Q2 of this year were the lowest since Q2 of 2021 and all of that is the testament to very strong credit performance,

Speaker 3

record origination volumes, both in total and more specifically on the new customer side. And Matt, I just wanted to touch on the revenue yield for a second over here. The revenue yield was higher than we had anticipated and that's a great thing. As Clive says, we have a very fast feedback loop and this is just the way we manage the business. The reporting systems that we have in place, we're looking at on a daily basis and whatever vintages of loans that we're originating with our bank partners, we see how they're performing very, very quickly.

Speaker 3

So as we open things up and lean more into the demand, we're able to see how the default rates are performing. So if they're in line, we're comfortable opening things up a little bit more and leaning into the demand further. So really the theme over here is that our default rates have been in line with our expectations. But at the same time, we've been able to do more volume because those default rates were held within our targeted line. We were able to do more volume and lean into the higher yielding segments of the portfolio.

Speaker 3

And that's what drove our yield up and that's what drove a beat on the revenue side for the quarter. So we're very, very happy about that outcome obviously. We've got our provisions going down and our revenue yields going up. It's a great obviously a great combination for our margins.

Speaker 4

Yes, extremely potent. And then just maybe if I can sneak a last one in, more of a philosophical question on dividend growth. Is there a payout ratio that you're targeting over the medium term? Because to me, it feels like the growth you have to generate on cycling capital is the best use of funds just given your super high ROE. But I imagine you feel like it's not a question of either, but that you can do probably both.

Speaker 4

Maybe any comments

Speaker 2

Yes. I think that's right, Matt. I think that we can do growth. We can do both. When we came to market, we said that we would pay up to 50% of our adjusted earnings in the form of dividends.

Speaker 2

Certainly, our debt facilities and covenants on our debt facilities provide for that. And longer term, we're comfortable moving up to 50%. And even though we've done 5 since the beginning of 2023, we're still recovering at around 22%, 23% of adjusted earnings, all of which is to say there's a lot of room to continue to increase the dividends, as well as to continue to grow the business, grow the book, grow the profitability. So I expect to see profits continuing to grow exponentially on a go forward basis for both the short and medium term. And over the medium term, would expect to see the dividend increases in most likelihood to grow at a faster rate than the rate of top line growth.

Speaker 2

At some point, Matt, in hopefully the not too distant future, the business starts throwing off so much cash flow that we could do all of that while not even growing our debt facilities.

Speaker 4

Right. Okay. Thanks so much guys. I'll pass the line.

Operator

Your next question comes from Adir Khadija of 8th Capital. Please go ahead.

Speaker 5

Hey, guys. Good morning. And let me add my congrats to both on the quarter and Clive on your nomination. What I want to talk about this morning is the lending as a service partnership. Clive, you've kind of talked about the importance of both originating good loans in the last partnership, but also kind of having that equilibrium with the purchasers as well.

Speaker 5

You've had this lending as a service program going for, call it, a couple of quarters now. Can you maybe speak to some of the ROI that the purchasers are seeing and how you guys are trying to balance that both origination and note more growing the purchaser aspect of it and how their ROI has fared?

Speaker 2

Yes, it's a great question. And let me start off by saying that their ROI keeps getting better and better. From our perspective, the most important thing regarding the long term success of that program comes down to the performance of those loans as far as the purchases are concerned. So more important than us to grow that at an exponential rate is to make sure we're growing it profitably as far as the purchases are concerned. And I think I've said it since we launched the program that the quality of those loans is getting better and better as we learn more and more how to underwrite, how to market and how to serve those consumers.

Speaker 2

So all of which is to say that purchases ROI the purchases ROI goals and guidelines that we provided to them are being achieved and if anything are getting better and better. The other thing that I've said is that bringing on purchases in these early phases, it's a relatively long sales cycle. The institutions that we're speaking to are committing many 1,000,000 of dollars to these programs. And as a result of that, it's a relatively long sales cycle, if you will. So we have lots of purchases lined up, ready to onboard hopefully in the next month and 2, 3, and 4.

Speaker 2

But I would say that that's the one part of the business that in the short term is taking us maybe a little bit longer to onboard than I would have said a year ago. And I think over the medium term, I'll probably turn around and say that happened faster than I thought it would. All of which is to say that the incredible growth that we're seeing on the lending as a service side, is I think going to accelerate even more as we onboard more of these purchases. And just to circle back to my initial comments, the most important thing is performance of these loans, which ultimately is what drives more and more purchases to come onto the platform. And we're really, really pleased with how that's going in general and also the improvement that we're seeing from quarter to quarter.

Speaker 5

Okay. Great to hear that commentary. Then previously, I think in last in previous quarters, you've kind of mentioned that the last partnership should contribute about 10% to 15% of adjusted net income in Q4. Are you is that still the goal? Any commentary or any updates around that?

Speaker 2

We continue to stick to that. And obviously, we're sticking to that at a time where as you could see our profits, if anything, and our top line growth is, if anything, is accelerating from what we initially thought. So all of which is to say, it's going to be 10% to 15% of an even larger number on an even larger total number.

Speaker 5

Awesome. Congrats guys again and let me I'll pass the line.

Operator

Your last question comes from Andrew Scott of ROTH Capital Partners. Please go ahead.

Speaker 6

Good morning. Congrats on the strong results and yes, Clive, congrats on the nomination. My first question has to do with new customer originations. You guys had a record number of new customer originations. Just kind of curious what the appetite is for the remainder of the year for new customers?

Speaker 3

Yes. Hey, Andrew. Thanks for your kind words. Yes, I mean, the typically in the second half of the year, as Clive mentioned earlier, our volume expands even further, right. So we're entering the higher growth periods of a given year, even though we've had incredibly high growth so far year to date.

Speaker 3

So right now, we're anticipating our new customer proportion to be kind of between 45% 50% as it has been so far year to date. And as I've said, now we're already over a month into Q3 and credit performance continues to be very strong and we continue to like what we're seeing in the market. And to that end, we're continuing to originate new customers that I would say at record levels. So thus far, Q3, Q4, as we look forward, is going to be high periods for new customer originations.

Speaker 2

I think Andrew, when I look back and I reflect back as to what's going on in the broader economy, relative to our segments of the population, I mean, our segments of the population relatively speaking is strong. There's real wage growth. I don't think you could say that across the different income segments in the U. S. Is certainly is in our segments of the U.

Speaker 2

S, which is strong. And as I mentioned in my prepared remarks, just about tighter

Speaker 5

than ever.

Speaker 2

And if you say to me, why is that? Is just about tighter than ever. And if you said to me why is that the case, that's the case because I think that they were fairly aggressive in 2020, 2021, the big banks and credit unions. And that was because consumers had just been given boatloads of cash and their credit score started improving artificially as a result of that. And lots of the banks and credit unions don't have as sophisticated underwriting and started increasing credit limits and increasing loans on that basis.

Speaker 2

And these were customers who probably shouldn't have got that in the 1st place and it's now coming back to hurt them. As a result of which they are now tightening up their underwriting. Again, I think April was tightest on record that they've been. And consequently, there's more and more customers coming to our segments of the market. And even while we maintain our tight, we and our bank partners maintain our tight approach to underwriting, we're doing it in an environment where we're seeing more and more consumers of higher quality.

Speaker 2

So in many respects, we're seeing this record origination growth with very, very strong credit performance. And when you cut through some of the noise in the macro, which we heard a little bit of noise last week, We think that we're really very, very well positioned to continue the trajectory of strong profitable growth that we've seen since becoming a public company. In addition to that, you're seeing the leverage in the business model where our expenses below quarter below the gross profit line as a percentage of revenues are declining all the time and every extra percent reduction in expenses relative to revenue has a meaningful impact on profitability, especially now that we've surpassed $100,000,000 in quarterly revenue, which again, we expect to increase going forward as well.

Speaker 6

Great. Really appreciate the detail there. 2nd from me, you guys did touch on this in the prepared remarks. For us, you might get a really strong quarter. You guys also mentioned kind of some of the headwinds facing some of the Canadian consumers.

Speaker 6

Just any detail you could provide on what you see through the balance of the year with the 4 would be great?

Speaker 2

I think that 4 is we've really been pleased with how 4 has been going. We haven't been that aggressive from a marketing standpoint, partially because of the regulatory change. We've kind of had 1 foot on the accelerator and 1 foot on the growth, notwithstanding quarterly growth in the CLAB in excess of 40% over there. And we're getting set to move into the 35% APR product over there starting in the New Year. So lots of the originations that we're doing today, in fact, the majority of them are at that sub-thirty 5 percent level.

Speaker 2

And I got to tell you, we're really, really pleased with what we're seeing on the demand side. For a company that's hardly out there marketing, we're seeing much stronger demand than we thought we would. If you said to me, what do we attribute that to? I do think that the Canadian FinTech market is getting better. There's 13% FinTech adoption in Canada compared to say 42% in the U.

Speaker 2

K. And 34% in the U. S. So there's a long way to go over there. And Andrew, I'll be honest with you, our product is just much better than anything else in the marketplace.

Speaker 2

It's not only a functional marketing, it's a functional product and process. And if you get on to the PROPEL or in this instance Sephora website and compare it to our competition out there, honestly, it's incomparable. And I think consumers are starting to know the difference. We're getting better and better at underwriting in the Canadian market. And as a result of that, not only are we growing, but we're growing with improving metrics all the time.

Speaker 2

It's nice to be based in Canada and finally have this Canadian business that we're really putting some real focus into and expect to see us coming up with a few big strategic announcements on the Canadian front, which if anything, we expect will accelerate that growth exponentially on a go forward basis.

Speaker 6

Great. Looking forward to those announcements and congrats on the strong results.

Speaker 2

Thanks so much. Much appreciated.

Operator

That concludes our question and answer session. I'd like to turn the conference back to Clive Kinross for closing remarks.

Speaker 2

Thank you, everybody, for attending our call this morning. I'd also like to say a big thank you to our investors for your continued support and belief in PROPEL and our vision of building a new world of financial opportunity. As always, I'd also like to extend a really big thank you to the PROPEL team. We've been working exceptionally hard as we've continued to transform an industry. With that, have an excellent day everybody.

Speaker 2

Operator, you may end the call.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Record Q2 2024 results: Propel delivered its first $100 million+ revenue quarter with total originations of $144 million (+40% YoY), revenue of $106.8 million (+49% YoY), net income of $11.1 million and ending CLAB of $392 million (+44% YoY).
  • Robust demand continued with record total originations funded, driven by tighter bank underwriting and an inflationary environment that is pushing higher-credit-quality consumers to Propel’s AI-powered underwriting platform.
  • Credit performance remains strong as loan loss provisions fell to 50% of revenue (best Q2 outside of COVID-19 relief years) and net charge-offs dropped to 11% of CLAB, confirming the efficacy of its AI-driven credit models.
  • Canadian arm Fora grew CLAB by 43% QoQ, posting record originations and revenue, and the delayed implementation of a sub-35% APR cap until January 2025 is expected to have a slight positive impact on 2024 results.
  • Lending-as-a-Service program accelerated with record originations and revenue, expanded into new states and added purchasers whose ROI metrics continue to improve as the platform scales.
AI Generated. May Contain Errors.
Earnings Conference Call
Propel Q2 2024
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