Sezzle released a December-quarter update ahead of our expectations. Total transaction value (underlying merchant sales) of US$105.1m came in 3% above our forecast of US$101.7m. Active customer additions exceeded our forecasts while merchant numbers breached 10,000, 8% higher than our estimate.
Merchant fee revenue of US$5.8m increased 62% quarter-on-quarter and was 14.5% ahead of our forecast as a result of the strong underlying sales number. In addition, Sezzle benefited from the higher than expected average merchant fee of 5.5%, which was 10% higher than our 5.0% estimate.
Historical data showed average spending per customer trending downwards prior to June 2019, before improving in the September quarter. This trend continued into the December quarter, with average spending per customer increasing from US$128 in the September quarter to US$135 as at the end of December. On our observations, this appears to be the pattern in the broader buy now, pay later (BNPL) sector.
The quarterly cash flow statement was also positive, with operating cash outflows of about US$6.4m stronger than expected. Following the drawdown of US$16.5m of debt during the quarter, Sezzle now has $36.6m of available cash on its balance sheet.
Sezzle reiterated that its net transaction margin and net transaction losses “continue to maintain positive trends”. We look forward to the CY19 result in late February and expect to see further evidence of this.
We have increased our revenue forecasts by about 5% in each of CY19 and CY20, while we have made minor changes to our operating earnings and net profit estimates.
In our view, the growth rates Sezzle is experiencing cannot be ignored and the company represents the best opportunity in the BNPL segment. We maintain our Buy recommendation with a target price of $3.40.