Affirm : Q3 2023 Earnings Transcript

Affirm Holdings, Inc.

Third Quarter 2023 Earnings Conference Call

May 9, 2023

Affirm Holdings, Inc. - Third Quarter 2023 Earnings Conference Call, May 9, 2023

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

Moshe Orenbuch, Credit Suisse

Bryan Keane, Deutsche Bank

Ramsey El-Assal,Barclays

Jason Kupferberg, Bank of America Merrill Lynch

Andrew Jeffrey, Truist Securities

Eugene Simuni, MoffettNathanson

Karandeep Singhania, UBS

Dan Dolev, Mizuho

James Faucette, Morgan Stanley

Rob Wildhack, Autonomous Research

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

Operator

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

(Operator Instructions)

As a reminder, this conference call 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.

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

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Affirm Holdings, Inc. - Third Quarter 2023 Earnings Conference Call, May 9, 2023

Zane Keller

Thank you, Operator.

Before we begin, I would 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 intent 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.

Hosting today's call with me are Max Levchin, Affirm's Founder and Chief Executive Officer; and Michael Linford, Affirm's Chief Financial Officer. In line with our practice in prior quarters, we will begin with brief opening remarks from Max before proceeding immediately into questions and answers.

On that note, I will turn the call over to Max to begin.

Max Levchin

Thank you, Zane. Thanks, everyone, for joining.

I hope you had a chance to read our quarterly letter as it packs lots of great information, but I will offer a very quick summary for you. We had an excellent quarter, beat across all of the important metrics we track, while continuing to maintain excellent credit results. On the execution side of things, I'm really proud of how the team performed this quarter. We shipped well over 100 projects from pricing to new credit model to dozens of user interface improvements. In isolation, each of these wins is probably relatively small, but they compounded to huge gains.

One major project this quarter was our continued effort in rolling out Debit+. We delivered Debit+ into the main Affirm app, and while it's still quite early, we continue seeing strong signal to consumer demand. Debit+ user transaction frequency after 90 days from activation is about seven times that of a regular Affirm user. I'm truly excited about this product and what the team has planned for it and we intend to give you a significantly more fulsome update on Debit+ in the quarters to come.

Seems that there is a once in a century event that happens every week lately, rattling capital markets, but we continue to deliver great returns for our capital market partners and it was rewarded by an incremental addition to our funding capacity in the quarter, as well as in April after we closed. In short, we had a great quarter. We compounded many small wins into big gains. We're very excited about Debit+ and the overall outlook for Affirm as a Company.

Back to you, Zane.

Zane Keller

Great. Thank you, Max.

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

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Affirm Holdings, Inc. - Third Quarter 2023 Earnings Conference Call, May 9, 2023

Operator

Thank you.

(Operator Instructions)

Our first question comes from the line of Moshe Orenbuch with Credit Suisse. Please proceed.

Moshe Orenbuch

Great. Thanks and congratulations. I saw in your letter, Michael, that you had a 110 basis point increase in the interest bearing GMV in the quarter and more than that if you went back six months. Could you talk a little bit about how much that will have risen by the time this is fully phased in? Also, just strategically, how does that impact both your willingness to serve certain types of merchants and your credit decisioning and what impact that could have on GMV?

Michael Linford

Thanks. Yes. We are proud of the progress that we made in our pricing initiatives. Just to recap on how this works, the first step for us is getting any caps in the way-getting those caps out of the way, allowing us to price where we think we need to price, always underneath 36%. We were subject to a number of 30% APR caps. One potential way to read that is there are six points. However, we don't intend to price every one with that amount. There is a reasonable limit to expect. That being said, we're about halfway rolled out and we've got about a point. I think a fair rule of thumb would be to double our progress today and that's a good ending spot.

In terms of the impact that those pricing initiatives have on approvals, it's absolutely the case that we get to approve more consumers, drive better conversion for our merchant partners, and grow our business faster by being able to price loans in that zone. That is our intent. Our intent would be to leverage that to protect asset yields for our Investors and still approve more volume. Part of the reason why we've seen the acceleration in our direct-to-consumer business is because of how we've been operating it, frankly, since we've been able to get that moved first ahead of any sort of merchant interaction.

Moshe Orenbuch

Thank you.

Operator

Our next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed.

Bryan Keane

Hi guys. Mike, maybe you could just give us your thoughts on the guidance, in particular revenue less transaction margin, just looking at that. Then the net take rate, I know there's always some puts and takes there when I look sequentially. Or, actually, just gross take rate and then net take rate. Maybe you can just help us, walk us through between 3Q to 4Q.

Michael Linford

Yes, thanks. We had obviously a really strong quarter on revenue less transaction costs in Q3, driven in large part by our outperformance in credit. That resulted in a pretty large beat ahead of our expectations

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Affirm Holdings, Inc. - Third Quarter 2023 Earnings Conference Call, May 9, 2023

in the provision for losses. That was despite operating in a very volatile capital markets. We assume that Q4 will remain volatile. That's not to say that it isn't a spot where we can add capacity. We do intend to add capacity like we do almost every quarter, but it does mean that we're being very thoughtful around what we assume as we prepare a forecast in the guidance that we aren't overly reliant on things getting better in the debt capital markets for us.

What that means for us is a little bit more of a reliance or usage of our warehouse funding mechanisms into our fourth quarter. As you see in the GMV guidance, we're showing pretty strong sequential GMV growth from Q3 to Q4. In fact, from a seasonality perspective, I think even faster than what we saw last year. As we saw during our second quarter, when you have that kind of sequential growth in GMV or that acceleration quarter-to-quarter, it can sometimes push some of the economics for loans originating in the quarter into subsequent quarters. The reason why Q3's outperformance was so strong was in part because of both the volume and balance sheet strategies we had used in Q2.

Volatile markets that we think we're going to be able to continue to navigate to fund and scale the business, but will change the shape of the earning a little bit and what we saw in Q3 versus Q2, we expect to see in Q1 of next year against Q4 this year.

Bryan Keane

Got it. That's really helpful. Just as a quick follow-up, the initial rollout of Debit+, how do we think about the modeling for that and the impact? Probably obviously not much in 4Q. But when should we start to see an impact and how do we think about the modeling?

Michael Linford

Yes, we haven't broken anything out because it's not big yet. We do intend to give you better tools to model it when we have it becoming a more material part of our business. Because we're not providing any guidance in 2024, we're not doing that today. But as we talked about before, there's really two different pieces to that product. One is, it will look more like our direct-to-consumer product that we have today, just looks like an installment loan. Whether that's a Pay-in-4 or a monthly installment loan. The other would be a P&L volume, which of course will have a very different margin structure.

Later this calendar year we plan on walking everyone through how to think about modeling it and the impact it has on the P&L.

Bryan Keane

Okay, great. Thanks for taking the questions.

Operator

Our next question comes from the line of Ramsey El-Assal with Barclays. Please proceed.

Ramsey El-Assal

Yes. Thanks so much for taking my question. I was wondering if you could update us on credit reporting and buy now, pay later seems to be an area of growing interest. Just wondering if you could share your latest thoughts on that topic?

Max Levchin

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ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

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