PROG Holdings just released their Q1 2024 earnings, and while analysts are focusing on the return to GMV growth and solid portfolio performance, there's a hidden gem buried within the transcript that could signal a revolutionary shift in their business model: the aggressive implementation of generative AI.

PROG isn't just dipping their toes into the AI pool. They've established a dedicated R&D group, PROG Labs, specifically focused on leveraging generative AI to enhance customer and retailer experiences while simultaneously boosting internal productivity and driving down costs. This isn't your typical corporate lip service to trendy tech; this is a calculated strategic move with potentially game-changing consequences.

The transcript reveals PROG Labs has already piloted AI solutions across a range of crucial functions, including customer support, fraud prevention, marketing, and even code cleanup. This broad-based approach suggests PROG sees AI as a fundamental tool for optimizing every facet of their operations. But what's truly remarkable is the potential impact of generative AI on PROG's core business: lease-to-own financing.

Imagine a world where AI seamlessly verifies consumer IDs, eliminating friction and speeding up the application process. Picture multilingual AI chatbots providing instant customer support, boosting satisfaction and expanding PROG's reach to a wider demographic. Envision hyper-personalized marketing campaigns driven by AI, targeting the right customers with the right offers at the right time, maximizing conversion rates and driving significant GMV growth.

"This isn't just wishful thinking; it's already happening. PROG Labs is actively testing AI-powered solutions for customer ID verification and multilingual support. And Steve Michaels, PROG's CEO, highlighted the profound impact generative AI is having on their ability to analyze customer feedback, stating it allows them to 'incorporate significantly more feedback into our product development cycle much faster than before.' This rapid iteration and customer-centric approach, fueled by AI, could be a key differentiator for PROG in the increasingly competitive lease-to-own market."

But the strategic brilliance of PROG's AI strategy goes beyond customer-facing enhancements. The company is also leveraging AI to drive internal productivity, ultimately reducing costs and boosting profitability. Imagine AI automating mundane tasks like code cleanup, freeing up valuable developer time for innovation and new feature development. Picture AI-powered fraud detection systems identifying and preventing fraudulent activity, minimizing losses and improving portfolio performance. These internal optimizations, often overlooked by analysts, could translate into significant bottom-line impact for PROG.

Potential Impact of AI on PROG's Key Metrics

The following chart illustrates a hypothetical scenario of how AI could impact PROG's conversion rates and cost reduction. These figures, while speculative, underscore the potential power of PROG's AI strategy.

While the exact financial impact of PROG's AI investments remains to be seen, the early indications are incredibly promising. The company's Q1 performance, which exceeded expectations despite a challenging retail environment, suggests their strategic initiatives, including AI, are already yielding results.

Here's a hypothesis worth exploring: If PROG can leverage AI to boost their approval and conversion rates by even a modest 2%, while simultaneously reducing customer support and fraud prevention costs by 5% through automation, the impact on their bottom line could be substantial.

For example, assuming their 2024 revenue guidance of $2.285 to $2.360 billion translates into roughly $10 billion in GMV, a 2% increase in conversion would represent an additional $200 million in GMV. Even assuming a conservative 10% net profit margin, that equates to a $20 million earnings boost. Similarly, a 5% reduction in customer support and fraud prevention costs, assuming a combined annual expense of $100 million (a conservative estimate), would translate into an additional $5 million in profit.

These figures, while speculative, underscore the potential power of PROG's AI strategy. And as the company continues to invest in and refine their AI-powered solutions, these impacts are likely to grow even more significant in the years to come.

PROG's quiet revolution in lease-to-own financing, fueled by generative AI, could reshape the industry landscape. While other players scramble to catch up, PROG is positioning itself as the AI-powered leader, ready to unlock a future of explosive growth and unmatched profitability. The question for investors isn't whether AI will impact the lease-to-own market; it's whether they'll be on the right side of this transformative wave.

"Fun Fact: The term 'generative AI' was coined in 2014 by a team of researchers at the University of Montreal, but the technology has exploded in popularity in recent years thanks to advancements in machine learning and the availability of vast amounts of data."