PROG Holdings, Inc. (PRG) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Prog Holdings Third Quarter earnings conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Baugh, Vice President of Investor Relations. Sir, please go ahead.

Thank you, and good morning, everyone. Welcome to the Prog Holdings Third Quarter 2026 Earnings Call. Joining me this morning are Steve Michaels, PROG Holdings Chairman, President and Chief Executive Officer; and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website, investor.progholdings.com. During this call, certain statements we make will be forward looking, including comments regarding our revised 2026 full year outlook and our outlook for the fourth quarter of 2026. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, all of which are subject to risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. We undertake no obligation to update any such statements. On today's call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP EPS, which have been adjusted for certain items which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. With that, I would like to turn the call over to Steve Michaels, Prog Holdings' President and Chief Executive Officer. Steve?

Thank you, John, and good morning, everyone. I appreciate everyone taking the time to be with us today. I want to start with the quarter highlights. Brad Holdings delivered strong top line growth with every business in our ecosystem contributing. At the consolidated level, GMV grew 59% year-over-year, matching the pace we set in the second quarter. Revenue grew roughly 26% and with non-GAAP EPS of $1.06, up 21.8% year-over-year. All of those growth metrics include the contribution of our purchasing power business, which we acquired in January 2026. Progressive Leasing, we grew GMV in the low single digits, even after tightening our decisioning posture, a sign of real underlying demand. Additionally, our gross lease asset balance the leading indicator of future revenue was higher year-over-year at quarter end. At Four, GMV grew triple digits for its 12th consecutive quarter, and it did so profitably with a quarter-over-quarter step-up in adjusted EBITDA margin. And at purchasing power, we delivered double-digit GMV growth. Producing this kind of top line growth while deliberately tightening our decisioning is exactly what a diversified, disciplined platform is built to do. Taken together, that performance put our consolidated results within the outlook ranges we provided for the third quarter with revenue and non-GAAP EPS landing near the midpoint. Adjusted EBITDA came in towards the lower end of its range. Drivers landing us at the lower end of that range were concentrated in leasing and largely reflect headwinds we expect to be temporary as our portfolio quickly turns over following our recent tightening actions. As a reminder, we tightened our decisioning for the leasing business late in the second quarter and we implemented some additional tightening actions since our last earnings call as the pressures on our customer persisted and in pockets even intensified. The impact on adjusted EBITDA traces to 2 factors in our leasing portfolio. The first is a reflection of an improving customer profile on our newer post tightening lease pools improved payment behavior resulted in more customers exercising their 90-day purchase option than we had expected, which compresses near-term yield. The second factor is on our older pre-tightening pools. Those customers have proven remarkably resilient, but a prolonged stretch of elevated inflation exacerbated by higher gas prices since March has worn on their day-to-day liquidity, which creates a headwind to portfolio yield. One framing point before I turn to the businesses. The customer pressure we are seeing is showing up differently across our 3 segments, and that dispersion is one of the benefits of the ecosystem we are building. It shows up in different ways and to different degrees across leasing for and purchasing power, each serving a distinct customer need at a distinct price point. having a range of products that have the ability to respond differently to the same macro pressures is why the consolidated result held steady even as one of the businesses in this as leasing or through a headwind. Our ecosystem of offering does 2 things for us. The first is resilience, which I just described, a range of products that respond differently to the same macro environment. The second and increasingly, the more powerful one is growth, and it's where we believe our durable long-term advantage lives, the same customer engaging with more than one of our products. A number of customers actively engaged with more than one of our products has grown since January, and these multiproduct customers now represent a more meaningful percent of our total active base. We expect to compound this share over time, and it matters more than the numbers suggest. Customers who use more than one PROG product tend to transact with us more frequently and stay with us longer every shopper we add to Four, every client account we bring on through purchasing power and every lease we originate widens the top of that funnel and creates another opportunity to serve the same customer across more of their financial life. That's the flywheel we've been building, and we are optimistic about the early momentum. The strength of that flywheel comes from each business that feeds it. So let me take you through them, starting with Progressive Leasing. Progressive Leasing GMV grew low single digits year-over-year with September being the strongest month of the quarter, a trajectory we like heading into the fourth quarter. As I mentioned, an important number is the gross lease asset balance which turned positive year-over-year at quarter end for the first time since April 2025. For a business where revenue is a function of the size of its lease book, that is the inflection we've been working toward and it tells us the revenue cost is set to turn. Let me put that group in context. We tightened our decisioning late in the second quarter and during the third quarter, and even so, leasing grew despite that pullback. Growing through tightening is exactly the kind of signal we want because it tells us the expansion is coming from wider distribution, deeper share with our retail partners and a real customer demand not a relaxation of our standards. Proof is in our approval rates, which are down nearly 300 basis points year-over-year, both in the quarter and year-to-date. We are increasing share and growing the book while holding the line on who we approve. On portfolio performance, lease merchandise write-offs came in at 8.3% of progressive leasing revenue a slight improvement versus last quarter. As we discussed in July, the second and third quarters are seasonally our 2 highest write-off periods and with the GMV growth from the last 2 quarters, some elevation is expected. And that is how it played out. We will adjust as needed, and we believe we will land near the high end of our 6% to 8% targeted annual range. Also want to place today's leasing portfolio in the context of where it was a few years ago. Measured against the last Simon inflation spike hit our customer, our leasing gross margin is up, on average, over 200 basis points. The model we are running today is structurally stronger than the one that navigated the last inflation shock, a durable well-managed business inflecting back to growth, not a declining one. And we continue to invest in the customer experience to keep it that way. Those investments are already showing up in the numbers. In the quarter, we shortened the application process for returning customers by an average of 3 to 4 minutes while continuing to provide applicants for fulsome and transparent disclosures. Now on the marketing front, by personalizing the language and messaging customers see we lifted application submissions by double digits. Our direct-to-consumer and digital efforts across Progressive Leasing's marketplace app and e-commerce were meaningful contributors, supported by our personalized marketing. Year-over-year, PROG Marketplace GMV grew 85% in the third quarter and approximately 128% year-to-date continuing to reinforce its role as a complementary channel that strengthens our retail ecosystem and expand customer engagement opportunities. Our e-commerce channel also gained ground, supported by an improved digital experience, reaching 26.4% of Progressive Leasing GMV in the quarter, up from 23% a year ago. Before I move on from Progressive Leasing, a brief word on business development. We feel good about our retail partner pipeline and the progress the team has made this year. We see near-term opportunity even with the window shortening in which decisions get made ahead of holiday readiness. We like how we are positioned and encouraged by where things stand. We will have more to share when it is appropriate. At Four, we delivered the 12th consecutive quarter of triple-digit GMV growth at 103% and did so profitably. Revenue grew 113.8% year-over-year to $37 million, and it generated $11.4 million of adjusted EBITDA, a 30.6% margin that stepped up from the second quarter. The scale here is compounding fast. From under $15 million of total GMV in 2021, Four is on track to grow roughly 100 fold in just 5 years. That growth is increasingly powered by returning customers who make up the large majority of orders, while average order value rose over 10% year-over-year as shoppers bought across newly added categories and we're pairing that loyalty with efficient organic and paid acquisition, reinforced by this year's investments in engagement, a catalog passed 37 million items and more flexible ways to pay. Importantly, Four is achieving this growth while responsibly underwriting applicants separately on each transaction. Forest customer engagement is showing up across the metrics that matter. Average purchase frequency held at roughly 5 transactions per quarter and active shoppers grew roughly 68% year-over-year. Four's subscribers are contributing approximately 80% of total GMV, a clear signal that customers are finding value in the offering. For take rate, which we define as revenue as a percentage of GMV over the trailing 12-month period was 10.8% and up from 10.7% in the third quarter of last year. Four continues to sharpen its underwriting as well. Its Q3 provision as a percentage of GMV decreased approximately 100 basis points compared to the same period last year. This quarter, we put an enhanced underwriting model into production built on a deeper set of applicant attributes, which in testing at more potential credit loss without defining additional business. AI is also improving how Four serves customers. 4BA, Four's AI support agent now handles Four Plus cancellations and refunds end to end, which is our first support flow that issues refunds automatically within defined eligibility rules. In early September, 4BA resolved approximately 90% of refund claims without human intervention. And our analysis shows that customers who contact support or file a claim keep ordering at the same or higher rates as those who never reach out a sign of these interactions or building loyalty, not eroding it. Unit economics are healthy. The business is scaling rapidly and profitably and 4 is increasingly a front door into the broader PROG ecosystem. We could not be more pleased with this growth or the quality of what's driving. Purchasing power had a strong quarter, generating $161.2 million of GMV, which is a 12.3% growth compared to the same period last year. Adjusted EBITDA rose sequentially to $12.9 million or 9.8% of revenue, which is a step-up from the 8.1% achieved in the second quarter as it moves into its seasonally strongest period. Subsequent to quarter end, Purchasing Power signed a large new client with over 50,000 eligibles, which we expect to launch in Q1. And as a reminder, Purchasing Power signed a large 80,000 eligibles employer in July that we expect to launch in Q4. Purchasing Power is performing as expected when we brought it into the portfolio, adding a resilient recurring payment business that broadens our reach and deepen the ecosystem. Lastly, we are ahead of schedule in capturing the operational efficiencies we identified during the acquisition and on track with integration of systems and streamlining processes. Now I want to touch on capital allocation. During the quarter, we repurchased 885,000 shares for $36.7 million. We brought debt down again sequentially, and we ended the quarter with a net leverage ratio of 1.5x. Returning capital at this pace while continuing to fund growth and improved net leverage reflects both the strength of our balance sheet and our conviction in where this business is headed. Our capital allocation priorities remain unchanged, reinvest in the business, pursue strategic M&A and returned excess capital to shareholders through share repurchases and dividends. Brian will take you through our updated full year outlook in a moment. We have reduced our revenue and earnings dollar ranges to reflect the challenged consumer we saw this quarter, which we expect will continue through the balance of the year. But I want to put that in perspective because I think it is a very important point. The midpoint of our revised adjusted EBITDA outlook is now at the high end of the initial range we gave in February. When we set that original outlook, we did not anticipate the conflicts in the Middle East or its effect on gas and other input prices for our consumers. Even so, after a year of real pressure on our consumer, we still expect to deliver the best case we laid out at the start of the year. That reflects this team's execution and the resilience of the platform we've built. It's why I'm confident in where we're headed. And we are putting capital behind that confidence. This morning, we announced our intent to enter into a $100 million accelerated share repurchase program, under which we expect to receive an initial delivery of approximately 2.7 million shares which will be an immediate benefit to [ Hasso ] and EPS. The final number of shares repurchased will be determined based on our volume weighted average share price over the course of the program. In connection with this expected ASR program, our Board replenished our share repurchase program, bringing the total amount available for future repurchases to $500 million giving us substantial capacity to keep returning capital to shareholders in the years ahead. Let me speak to why and why now because the timing is deliberate. Two things give us both the room and the conviction to act. First, the balance sheet, having repaid $260 million of recourse debt since the Purchasing Power acquisition in January, and having a return to within our targeted net leverage range, we have the flexibility to return meaningful capital without pulling back on our growth investments. Second, our conviction in this business Progressive Leasing's portfolio is short in duration, which means it turns over quickly and gives us clear current visibility into how it is performing and the ability to adjust in real time. Nothing we have experienced in this environment dampens our optimism for the long-term prospects of that business. If anything, it reinforces that the model is working as intended. The fundamentals are strong. The model is proven and our ecosystem is contributing. Even as we take a more cautious near-term view on the macro and bring down our adjusted EBITDA range, our belief in the long-term earnings power and cash flow generation of this business is unwavering committing to returning capital to shareholders at this scale is a clear indication of that confidence. We believe we remain on track to achieve the 3-year compound annual growth targets we laid out at our Investor Day in March across all metrics. This accelerated share repurchase program is expected to be accretive to our 2027 earnings per share, and we would not be acting at this scale if we are not confident in the earnings power of this business in 2027 and beyond. With that, I'll turn it over to Brian. Brian?

Thanks, Steve, and good morning, everyone. Before I move through the results, let me headline the quarter. As Steve said, this is a quarter of strong profitable top line growth in the face of intense macro headwinds and further tightening in our decisioning posture. The diversified platform absorbed pressure in the progressive leasing portfolio and still delivered revenue, EBITDA and EPS within our outlook ranges for Q3. I'll begin with some commentary on the Progressive Leasing segment before moving through the rest of our results. Starting with Progressive Leasing. GMV grew 2.3% year-over-year to $420.4 million, the continuation of the positive trajectory that began earlier this year even after the tightening we deployed late in the second quarter and again since our last earnings call. I'll also note that GMV showed acceleration exiting the quarter with September posting the strongest month of the quarter. As we analyze the growth trajectory of the business, a key metric turned positive this quarter. Our gross leased asset balance grew for the first time since April of 2025. As revenue follows that asset base, this represents a positive trajectory for Progressive Leasing revenue. Revenue for the leasing segment was $552.7 million down 0.7% year-over-year compared to down 3.4% last quarter, a clear sequential improvement in the comp, and we expect revenue to comp positively in the fourth quarter as the asset base rebuilds. Progressive Leasing gross margin came in at 31.8%, down 20 basis points year-over-year and step down from the unusually strong gross margin performance we saw in the second quarter. I want to provide some additional color on the headwind we saw in the portfolio yield for the leasing business in the third quarter. As you may recall, in Q2, we experienced favorable portfolio yield dynamics where we saw gross margins and EBITDA margins at elevated levels even as higher delinquencies driven by macro challenges for our consumer played through the portfolio. The overall mix of lower 90-day buyout rates and customers staying in their leases longer, more than offset some of the delinquency pressures we had observed. Further, we deployed iterative tightening measures in Q2 and early Q3 aimed at improving write-off rates. That tailwind subsided during the third quarter. As we began to see the mix of lease outcomes begin to decline from Q2 levels, including 90-day buyouts trending higher on the post tightening pools. At the same time, delinquencies continue to be impacted by persistent inflation driven in part by higher fuel prices, particularly on the pre-tightening pools. The net result was the pressure on the lease portfolio we saw in the quarter. As Steve mentioned, Progressive Leasing took incremental tightening steps since the July earnings call, but we do not believe these changes alter our ability to deliver GMV growth in Q4 and beyond as we remain focused on growing our gross leased asset balance. I'll also note that Progressive Leasing's decisioning posture and approval rates are more conservative year-over-year, but we are still expecting to grow against that dynamic. Finally, as we have seen over the years, the short duration of the leasing portfolio allows us to quickly alter performance to remain within our long-held guardrails. We believe we have taken the correct tightening actions and will monitor lease portfolio performance in the periods ahead. Write-offs in the quarter came in at 8.3% of leasing revenue versus 8.4% in the second quarter and 7.4% a year ago. The year-over-year comparison looks elevated largely because of the significant tightening in Q1 of a year ago and the more intense macro headwinds our customers face. We are monitoring payment behavior, delinquencies and vintage level performance continuously. We expect full year 2026 leasing write-offs to land near the high end of our targeted annual range of 6% to 8%. Progressive Leasing's SG&A for the quarter was $83 million or 15.2% of revenue as we balance cost control with targeted investment in technology, customer experience and AI. Turning to Four Technologies. GMV grew nearly 103% year-over-year to $330.4 million and segment revenue more than doubled to $37.2 million. The key financial point on for is that this growth is both profitable and well controlled. We recognize expected losses upfront as we originate and loss performance is tracking in line with our seasonal expectations. As Steve noted, the enhanced underwriting model we rolled out earlier this year is already proving out. For loss provision as a percentage of GMV improved by roughly 100 basis points year-over-year while achieving this impressive growth trajectory. For generated adjusted EBITDA of $11.4 million or 30.6% margin and a step up from the second quarter. So it is pairing rapid scale with healthy and improving unit economics and is increasingly meaningful to the consolidated model. Purchasing power generated GMV of $161.2 million, delivering double-digit growth revenue of $131.8 million and adjusted EBITDA of $12.9 million or 9.8% of revenue, up from 8.1% last quarter. The seasonal strength of the fourth quarter is still ahead of us. The drivers of the sequential improvement were operating leverage as we captured efficiencies. Favorable product mix, which lifted margin and lower interest expense on securitized debt as we paid down a portion of the remaining warehouse facility with our excess cash. As a reminder, we treat that ABS interest expense as a form of cost of operations, so Purchasing Power segment adjusted EBITDA is burdened by that cost. Purchasing Power was acquired at the start of this year so it did not contribute to the prior year consolidated base in our financial reporting. Moving to consolidated results. GMV grew 59% year-over-year to $912 million and revenue from continuing operations grew roughly 26% to $725.8 million. This year-over-year revenue performance was driven by the addition of Purchasing Power and triple-digit growth partially offset by progressive leasing. Consolidated adjusted EBITDA was $80 million, representing an 11% margin and non-GAAP diluted EPS was $1.06, up 21.8% year-over-year. Turning to the balance sheet. We ended the quarter with $108.9 million of unrestricted cash and total available liquidity of $458.9 million, including our revolving credit facility. Recourse debt was at $600 million. And since closing the Purchase Power acquisition, we have paid down $260 million of recourse debt, bringing our net leverage ratio to 1.5x trailing 12-month adjusted EBITDA. We have now operated within our long-term target range of 1.5 to 2x for 3 consecutive quarters, having stepped down quickly after the Purchasing Power acquisition in January of 2026. The result is a balance sheet that gives us real flexibility, the capacity to keep investing in our growth priorities to pursue selective value-creating opportunities and to return capital to shareholders, all while preserving the financial strength to navigate a dynamic consumer environment from a position of confidence. We also returned capital to shareholders during the quarter. We paid our quarterly dividend of $0.14 per share and repurchased 885,000 shares at an average price of $41.47. We continue to evaluate opportunity to return capital to shareholders while funding GMV growth across the business. The intended accelerated share repurchase program, Steve mentioned, reflects the same discipline, putting the balance sheet to work while preserving capacity to keep funding growth across the platform. I'll now touch on some key aspects of our revised full year outlook, providing this morning's release. We're taking a prudent view of the consumer as we close out the year. The payment and buyout behavior we saw this quarter tells us households are still absorbing the cumulative effect of several years of elevated prices as well as the significant increase in the fuel prices since March of 2026 and we think it's appropriate to reflect that caution rather than count on sharp fourth quarter improvement. As a result, we're revising down our revenue and adjusted EBITDA outlook ranges. However, our GMV grew across all 3 segments, and we are encouraged by the metrics around our recent portfolio of vintages. Our revised consolidated outlook for continuing operations in 2026 calls for revenue in the range of $3.015 billion to $3.05 billion adjusted EBITDA in the range of $345 million to $355 million and non-GAAP EPS in the range of $4.70 to $4.85. This outlook assumes an operating environment for the remainder of the year that is consistent with current conditions, including the current financial pressures and uncertainties for our customers. No material changes in the company's decisioning posture, no meaningful increase in unemployment rates for our consumer -- or for our customer base and an effective tax rate for non-GAAP EPS of approximately 26%. This outlook assumes we will enter into an ASR program during the fourth quarter of 2026 to repurchase $100 million of our common stock with our non-GAAP EPS outlook reflecting only the initial delivery of approximately 80% of the shares to be repurchased and excluding the remaining shares, if any, delivered a final settlement. However, there can be no assurance that we will enter into the ASR program as anticipated or at all. To wrap up, the third quarter presented more macro challenges for our customer and leasing work through portfolio challenges, but we delivered the consolidated results within our outlook range. Progressive Leasing portfolio inflected positive in the period. for delivered its 12th straight quarter of triple-digit growth, and purchasing power grew double digits in line with our expectation. We delivered that performance while managing the portfolio of discipline and maintaining a conservative balance sheet with leverage comfortably inside our target range. During the quarter, we continued to return capital through our dividend and share repurchases. We aim to close out the year focused on profitable growth and an improving portfolio. I'll now turn the call back over to the operator for questions. Operator?

[Operator Instructions] Our first question is going to come from the line of Kyle Joseph with Stephens.

Just wanted to touch base on the Consumer Health and just I totally understand what's going on. And obviously, it seems like it's impacting the leasing business, particularly when you contrast that with 4 really strong results. Would you call that -- is that really a function of kind of end consumer being different? Or do you think it's more product related and tied to kind of the size and the duration difference between those 2 businesses? I would just like to get your thoughts there.

Yes, I'll start with the consumer. Obviously, it's -- all of our products are consumer exposed, I would say, in near prime and below. In July, I said because the consumer was stressed but resilient. But I think that's still accurate. Although I would admit that the longer the stress, particularly this gas price shock and just general input cost shock that's causing things to get more expensive. The longer the stress goes on, the harder it is to maintain resiliency. And that's why we can adjust our portfolio and decisioning processes to make sure that we let the right folks into the portfolio. All of our businesses benefit from a very short duration and quick turnover. But to your point about Four versus leasing or other products, leasing has a longer duration than Four. And one of the benefits that has is the lower ticket, but also the fact that even on returning customers, we decision or underwrite that customer the next time. So while a lease gets written for 12 months and has an average life of 6.5 months, for transaction is much shorter in duration. And then to the extent that some gas price or other shock impacts that consumer and they come back, we have the ability to assess that the wherewithal and the ability to pay again in a very short duration. And so I think that is one of the big things that helps us across the different portfolios.

That's really helpful. And then just a follow-up, probably for Brian. Obviously, this is our first quarter trying to model out purchasing power. We get the seasonality of that business. But just in terms of timing, kind of in terms of originations, thinking about provision and whatnot there. Is it one of those things where originations are pretty back weighted based on holidays spending? Or is it holiday spending feels like it moves up a bit every year. Just kind of want to think about how we should be modeling that and the timing around originations there.

Yes. I think Kyle, I think the seasonality dynamic with Purchasing Power is certainly pronounced and anchored in Q4 and you see that with our guidance, kind of the year-to-date performance and where they're at from a revenue perspective and what we're implying in our outlook for Purchasing Power. And so they've certainly -- again, the first year under our operations, and we are getting better each quarter at a degree of precision around the metrics. But certainly, the holiday season is significant for purchasing power, and we've got the right team and processes and plan in place to execute in Q4 but your sense is right. I think you can see the order of magnitude just from the guidance that we have provided.

And our next question will come from the line of John Hecht with Jefferies.

So I guess, first, back on Purchasing Power. Q4, I mean, number one, what can you tell us about how October is trending. It sounded like September saw some good activity. And in addition to that, on purchasing power, maybe talk about, call it, customer trends, the B2B, which side of the relationship and activity in that regard.

Yes, John. Yes, we're not really commenting beyond the quarter end as the trends on purchasing power, we did see, like you said, like you mentioned double-digit GMV growth in Q3. But as Brian just discussed, Q4 is an all-important quarter as a retail platform, we experienced the most seasonality in that business, and we're going to be executing through our first Black Friday and holiday period. The consumer is generally employed, which is a good thing, and we're pleased with our client roster and lineup. On the biz dev side, we have had some activity. We did sign a sizable new client partner here subsequent to quarter end that won't impact this year. It's a launch. And then the signing that we announced last quarter, we do expect to launch here pre-holiday so we're expecting that to have an impact for us in Q4. And we've got lots of other lines in the water on the biz dev front. This particular business is biz dev season, I would say, is impacted by open enrollment. So whereas on the leasing side, we kind of hit code freeze and holiday readiness for retailers on the purchasing power side. Total rewards teams are certainly busy during open enrollment season. So while we keep the conversations going and the pressure on, it's likely that A lot of those things will start to move forward again once we flip the calendar page to '27.

Okay. That's super helpful context. And then with Four, still very strong momentum there. I think a lot of the customer activity over the course of out of this year has been just sort of organic kind of pull growth. I think you guys were maybe exploring some sort of more outreach in terms of different marketing programs. Maybe can you give us an update on that and how that's translating into, call it, customer inflow?

Yes. We're very pleased with across all the channels. We continue to have a very robust organic acquisition and just kind of a word of mouth and referral network that we're pleased with. We are testing and leaning more into paid acquisition and placement in the app store, we see a definite correlation between how we're positioned in the App Store and also Google Play for that matter, but mostly App Store and installs and acquisition, very data-driven optimization around marketing, mostly through social, as you would imagine and we're seeing good results there. We have a good plan here for Q4, and we are spending more in marketing this year than we did last and we expect that will continue but we're still very, very pleased with the return on that ad spend and the ability to drive new customers into the platform, which then become 4 plus customers and then become repeat multiple time customers, which is a good thing for lifetime value and general GMV production.

And our next question is going to come from the line of Hal Goetsch with B. Riley Securities.

You give us a little more color on the tightening actions you took and maybe give us a feel for maybe what the impact was on GMV because if you did tighten a little bit in Q3, but then also saw GMV growth. That's some pretty powerful stuff. I want to know maybe what that impact was. And then given the short duration of the portfolio on leasing, what's your confidence level and like getting into that 6% to 8% range or at least in the 7% range on lease charge-offs after a couple of different tightenings and comfortable with the cohorts that are currently showing right now.

Yes, I'll start and Brian can certainly fill in any gaps that I miss. Yes. I mean we -- as we mentioned in July, we did some tightening in Q2. We saw the need to do some additional tightening in Q3. Post call, we did see some deterioration in the performance of the pre-tightening pools, which caused us to take some more action. But I think I appreciate your focus on the fact that we're continuing to grow through that. . And that's because of a lot of the initiatives that we have, both with retail partners as far as partner marketing as well as additional integrations, also our direct-to-consumer business with marketplace growing very robustly. And just generally digital channels becoming a more impactful part of our business at almost 27% of GMV in the third quarter and certainly holiday season, we expect it to be even more than that. So we feel like we've got the approval amounts or amounts and rates dialed in. It certainly had several I'd say, several hundred basis points of pressure on the GMV production in Q3, and we would expect that probably in Q4 as well. But the reason we have such confidence is because we've executed this business through these cycles before, and we've seen this movie before. We have the ability to manage the portfolio in a fairly tight band, we think very tight band. It turns over quickly the pre-tightening lease pools will be largely through the portfolio by the end of this year with some revenue into Q1. And we do believe we have the ability and made the appropriate moves to land near the high end of that 6% to 8% long-held range. I'm not making news here and changing that range. But I would say the 6 part of that 6 to 8 is not really appropriate anymore. I'm not even sure that we would -- we or you would want us to run the business down in the 6s. So as I mentioned in my prepared remarks, the gross margin of the business has structurally changed over the last several years. And so being in that whatever 7% to 8% part of the range is probably more appropriate and not knowingly leaving EBITDA dollars on the table. So we look forward to operating the business through this holiday season. The portfolio will do what it does on a short duration portfolio, and it will turn over and we'll be in good shape with a lot of the things that we've got on the table for '27 and beyond which is why we're confident in really excited about hitting those 3-year CAGRs from the Investor Day and taking this opportunity to brings quite a few material amount of shares back in through the ASR while still having confidence in the earnings power of the business and cash flow generation.

Paul, you mentioned some technology improvements you shorten the application times 3 to 4 minutes. That's a lot of friction taken out of the process. I was wondering if you had any comments on how that might have decrease any card abandonment or close rates or something like that to share with us? That sounds like a pretty good efficiency gain.

Yes, we're pleased with the innovation that our product team is bringing in the improvements or the removing of friction from the process. This particular stat was related to returning customers, and that's really just kind of changing the flows and making it easier for us to use the data that we already have on the customer to make it easier for them to come back and do business with us. And we certainly have plans to remove friction from new customer flows as well. We're tracking conversion at every point and different abandonment points or cutoff points across all the flows. And as you can imagine, the flows are a little different in our direct-to-consumer, whether it be the product marketplace or just generally DTC or in an integrated flow with a large retail partner. And so we're looking to make changes everywhere we can while still providing the most fulsome disclosures for our consumers. And clearly, the consumer would like to have 0 friction, and that's what we're working towards, but we also have to make sure that they understand the transaction, returning customers, it's a little easier because they've done business than us before. And we also have to make sure that we're protecting the portfolio, which we know is job one. So A lot of great progress made there. More to come, certainly, I'm really proud of the teams for what they're delivering.

And our next question is going to come from the line of Bobby Griffin with Raymond James.

Steve, you spent some time on the credit side, but obviously, there was a public report out that kind of pushed back on some of free credit aspects. I think you mentioned that loss provision improved year-over-year by 100 basis points. But maybe can you spend a little bit of time just unpacking that further, how it trended sequentially? How you guys are -- anything more just to kind of unpack credit there on that business as it's obviously growing very healthily and just to help us get comfort around that level of growth with managing the risk side of that growth?

Yes, I'll start and Brian can chime in, but the reality is that business is performing very well, we couldn't be more pleased. Massive growth, improving portfolio dynamics. It's inappropriate to compare December to June or September due to the seasonality of the business. But things are getting better there, right? And so the provision expense is down year-over-year and the underwriting changes and model improvements and enhancements are doing what we want them to do. We still have a pretty good percentage of our GMV production coming from new customers, and they inherently come with higher risk but things are performing as we would expect. And you wouldn't want me to get into talking about CECL. So I'll turn it over to Brian.