Affirm : Q1 2023 Earnings Transcript

Affirm Holdings, Inc.

First Quarter 2023 Earnings Conference Call

November 8, 2022

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C O R P O R A T E P A R T I C I P A N T S

Zane Keller, Director of Investor Relations

Max Levchin, Founder and Chief Executive Officer

Michael Linford, Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

James Faucette, Morgan Stanley

Moshe Orenbuch, Credit Suisse

Ramsey El-Assal,Barclays

Mike Ng, Goldman Sachs

Julian, Truist Securities

Reggie Smith, JPMorgan

Chris Brendler, D.A. Davidson

Kevin Barker, Piper Sandler

Bryan Keane, Deutsche Bank

Mihir Bhatia, Bank of America Merrill Lynch

Eugene Simuni, MoffettNathanson

Andrew Bauch, SMBC Nikko Securities

P R E S E N T A T I O N

Operator

Good afternoon. Welcome to the Affirm Holdings First Quarter 2023 Earnings Conference Call.

Following the speakers' remarks, we will open the lines for your questions. As a reminder, this conference is being recorded, and a replay of the call will be available on our Investor Relations website for a reasonable period of time after the call.

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I'd now like to turn the call over to Zane Keller, Director of Investor Relations. Thank you. You may begin.

Zane Keller

Thank you, Operator.

Before we begin, I'd like to remind everyone listening that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website. Actual results may differ materially from any forward-looking statements that we make today. These forward- looking statements speak only as of today, and the Company does not assume any obligation or intend to update them except as required by law.

In addition, today's call may include non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. For historical non- GAAP financial measures, reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck, which is available on our Investor Relations website.

Before turning the call over, we want to briefly note our shift to a quarterly shareholder letter instead of a lengthy press release and prepared remarks. We believe that this format will enable us to spend more time answering questions from the investment community. As such, we encourage you to review the shareholder letter for commentary that we would typically include in our prepared remarks. In addition, we believe that the shareholder letter, when read in conjunction with our earnings supplement, will enhance our ability to communicate with the investment community. Both documents are available on our Investor Relations website. This change was also influenced by feedback that we received from investors. We hope you find the shareholder letter informative, and we welcome any feedback.

Hosting today's call with me are Max Levchin, Affirm's Founder and Chief Executive Officer, and Michael Linford, Affirm's Chief Financial Officer.

With that, I'd like to turn the call over to Max to begin.

Max Levchin

Thank you, Zane.

We appreciate everyone taking the time to join us.

Our results reinforce the confidence we have in our strategy and Affirm's ability to capitalize on our opportunities. Two years ago about this time, we were preparing for a journey as a public company. We're now completing our eighth quarter as a publicly traded company, and it seems a really good time to compare our results for the 12 months ending September 30, 2022 versus the 12 months ending December 31, 2020, which was the last calendar year as a private company for us.

Since then, in comparison, we've more than tripled active consumers, we've quintupled transactions almost, we've grown transactions per active consumer 1.5 times, per transaction frequency by 50%, and near tripled our trailing 12-month GMV. Those have doubled our revenue and almost tripled revenue less transaction costs, growing it up to $732 million. All the while, we've been in control of our credit results. Delinquencies and net charge-offs remain at or below pre-pandemic levels, very important to us. We remain focused on the long term while making sure to navigate the present macro volatility very thoughtfully.

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We're continuing to obsess over risk and transaction costs to maintain a strong unit economics. We will shift features that improve network scale and profitability like we always have. We're going to manage our OpEx carefully while investing in our highest conviction product opportunities. We're building deep connections with consumers and merchants who need us now more than ever before. Both sides of our network can navigate economic uncertainty and we see this as an opportunity to solidify our position as a trusted and reliable partner.

Back to you, Zane.

Zane Keller

Thank you, Max. With that, we will now begin our question-and-answer session. Operator, please open the line for our first question.

Operator

Thank you. Our first question comes from the line of James Faucette with Morgan Stanley. Please proceed.

James Faucette

Thank you very much.

I want to talk first about this path to profits in 2023. Obviously, you reiterated that, but nevertheless, you're looking for little bit lower GMV and associated performance on the top line. How are you thinking about the evolution of that timing and what you need to do to make sure you get to breakeven or profitability in 2023?

Michael Linford

Hi, James. Thanks for the question.

Yes. We are still very much on time and on pace to achieve the profitability goal that we outlined, which just to recap for everybody, we talked about getting to profitability starting in the first day of our Fiscal '24. We said on a sustainable basis, meaning that we'll intend to do it repeatedly most of the time and looking at adjusted operating income. And so for us, the challenge is some pretty simple math. We need our revenue less transaction costs to be greater than the adjusted operating expenses that we have below the transaction cost line.

The key things for us then are making sure we're doing everything we can to maximize the unit economics in the business. If you look at our back half of the year road map, we have a lot of focus on making sure we're doing all that we can and should do there, as Max outlined in the letter, and we're going to be mindful about controlling our operating expenses. For that, that means being very careful in particular on hiring but also making sure that we're not having any pockets of waste in the business. As we continue to scale the business and make the right investments, we also don't want to have dollars wasted in the system.

If you look at our kind of guidance, the back half of the year and the adjusted operating expenses that are implied by that, we feel like we'll put this in a really fit shape so that we'd be exiting right where we want to be to achieve that goal for next year.

James Faucette

Thanks for that, Michael.

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Then on-there's a lot of places we could go but let's start with starting with delinquencies. You mentioned in the prepared remarks that you're still a bit below where you were pre-pandemic. However, directionally, you're starting to get pretty close to those levels now, and I'm just wondering how you're thinking about managing that, especially since I would think that there would be an increasing number of repeat customers in that 2023 versus pre-pandemic, which if they're repeat, you would think that they would tend to be better behaving in terms of at least delinquency, etc.

So where should we think that you'll try to top those out at? How are you going to manage that? What's I guess the prognosis for when you would do that and under what conditions?

Max Levchin

I'll start, and I think Michael can probably help quantify the second half of the question.

So just to set the stage, the most important thing to take away from us, we are not just managing credit outcomes; we set them. The whole point of these ultra short-term 4.6 months weighted average life of every loan, every transaction is underwritten, we have full control of transactions requiring down payment, or not, we control the amount of the down payment, etc., etc. We have lots of levers we use to control risk. We've talked about this many, many times, but it never gets old, and that gives us a lot of very nimble controls over the actual credit outcomes. So we set a number we want to hit.

Obviously, every week, we get a stack full of new information going back all the cohorts that are still active, and we adjust credit, and we have been now managing it quite actively to make sure that we get to the numbers that we require. Because the back book runs off very quickly, we have a lot of control. This compares pretty favorably with the rest of the industry that does things like credit card consolidation loans or personal loans that go back years and there's nothing you can do about it. So that's just a really important thing to understand.

Again, I apologize to those for whom this sounds like just an old repeat, but this really is how this business works. The reason our numbers are strong as they are today, and you can see this in the letter, is not an accident. It's not as though the world hasn't changed. There's plenty of stress on the consumer in the lower income brackets, lower credit quality. We're just good at managing, and we do underwrite every transaction, and therefore, we have a lot of control. So that's sort of the backdrop.

The counterpoint to this is the demand for BNPL is increasing. Serving our consumers, we see demand in the application side of things. Generally speaking, people are turning to-and not just BNPL by the way. If you look at credit cards, people are turning to them more than they used to because of the pandemic. People are not done in these higher income brackets spending through the pandemic stimulus, but they're getting closer, probably sometime mid next year is when we'll see the exhaustion of those savings, but today, the lower income groups are already done and they're trying to turn to various forms of debt.

We believe pretty firmly we represent the best alternative out there. We have 85% repeat transaction from existing consumers to prove that. And so you have enough demand, and we do have a lot. We have enough diversity of merchants where, as folks shift out of connected fitness and fancier homewares and go for the big box sort of more commodity purchases, we are there to help them with all those things.

So, demand is still quite strong. If we have control, as we do, of all of our credit outcomes, we can manage to the number that we need and want. That's sort of how we're doing it.

Michael can give you a little bit more data on exactly where we intend to run it, but again, this is a choice we have as opposed to a thing we have to contend with.

Michael Linford

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