Affirm : Q2 2023 Earnings Transcript

Affirm Holdings, Inc.

First Quarter 2023 Earnings Conference Call

February 8, 2023

Affirm Holdings, Inc. - Second Quarter 2023 Earnings Conference Call, February 8, 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

Ramsey El-Assal,Barclays

Rob Wildhack, Autonomous Research

Dan Perlin, RBC Capital Markets

Jason Kupferberg, Bank of America

Rayna Kumar, UBS

Andrew Jeffrey, Truist Securities

Bryan Keane, Deutsche Bank

Moshe Orenbuch, Credit Suisse

Chris Brendler, D.A. Davidson

James Faucette, Morgan Stanley

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 Affirm Holdings Second Quarter 2023 Earnings Conference Call.

Following the speakers' remarks, we will open up the lines for your questions. 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.

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Affirm Holdings, Inc. - Second Quarter 2023 Earnings Conference Call, February 8, 2023

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

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.

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

Max Levchin

Thank you, Zane.

We appreciate everyone taking the time to join us. I hope you've had a chance to review our letter to shareholders as it contains a great deal of detail.

Amidst increased macroeconomic headwinds, our Fiscal Q2 had mixed results. Revenue was at the low end of our expected range, and adjusted operating income came in better than expected. On the other hand, gross merchandise volume was short of expectations as was revenue less transaction costs as our mix shifted to more interest-bearing loans and we retain more loans on the balance sheet.

We once again reported excellent credit performance as delinquencies fell on a sequential basis. Our continued vigilance and attention to credit outcomes allowed us to meaningfully increase our funding capacity in January.

We also acknowledge a tactical error on our part that hurt our results. We began increasing prices for our merchants and consumers later in the year than we should have as this process has taken us longer than we anticipated. This is a lesson we will not soon forget, though it does not change our long-term outlook at all.

We have taken appropriate action from implementing pricing initiatives, which are gaining traction, to refocusing our product development effort on margin optimization and core growth to the most difficult decision of all, reducing the size of our team by 19% today.

I believe this is the right decision as we have hired a larger team that we can sustainably support in today's economic reality, but I am truly sorry to see many of our talented colleagues depart and we'll be forever grateful for their contributions to our mission.

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Affirm Holdings, Inc. - Second Quarter 2023 Earnings Conference Call, February 8, 2023

With a smaller, and therefore, nimbler team, we are focused on achieving profitability on an adjusted operating income basis as we exit Fiscal '23 by executing on three key initiatives. Accelerating GMV growth while optimizing RLTC, engaging consumers to drive greater frequency and repeat usage, and growing Debit+.

We continue executing on our strategy to scale our network, make disciplined high conviction bets in our most promising opportunities and capitalize on our massive secular tailwinds. If anybody wants to ask me about the recently proposed rule on late fee, please go for it. We'll head to Q&A now.

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 is from Ramsey El-Assal with Barclays. Please proceed.

Ramsey El-Assal

Hi, thanks so much for taking my question this evening.

I was wondering on the new pricing actions that rolled in a little bit late, what do you see there typically in terms of attrition or other impacts kind of downstream when you go about rolling those in? Is that a risk factor for later? Or do you have a pretty good idea in terms of what to expect as you roll those pricing actions in over the course of the next few months?

Max Levchin

We have seen zero attrition that I can think of. Michael, I'm sure, will correct me. But it is not a matter of risk of implementation, but it is very much a matter of timing. The process is a little more complicated than, in some cases, anyway, than simply notifying someone because for a large percentage of our merchants, they utilize something or anything in our set of offerings as far as buying down rates is concerned. The conversation isn't just, hey, we need to raise prices on consumers or you need to pay us more MDR. It's inevitably a conversation about how the programs change, what buydowns will look like going forward now that there's a different construct in front of the consumer.

For example, you might see we now have a significantly more visible set of 4% and 5% APR is not a product or not a program that we featured last year at all, etc. It's a matter of underestimating complexity on our part. The other unfortunate reality is that having these conversations in calendar Q4 with merchants is just not something that happens very quickly. We don't have much risk in those conversations, but the timing made a little difference.

Michael:

Then I think it's also important to know that from a consumer price standpoint, we continue to believe that there is very minimal elasticity. In thinking about the impact on the top line and the top of the funnel, we don't think there's a measurable impact there.

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Affirm Holdings, Inc. - Second Quarter 2023 Earnings Conference Call, February 8, 2023

Ramsey El-Assal

Okay. One quick follow-up for me. I also noted that more of your GMV was coming from interest-bearing loans, and as you called out, the highest ratio in the corporate history. Can you just comment on how we should expect that to trend going forward? Is that a rate that should continue to increase? Or I've noticed that I've seen some, for example, some 0% loans on the Amazon website that I hadn't seen in the past. Could we expect that to come in?

Max Levchin *check who speaking

I think it's, generally speaking, reasonable to expect, as the Fed rate continues to go up or at least remains high or elevated relative to last year, to see more interest-bearing loans versus zeroes. That said, the subsidies to reduce the rates or eliminate them entirely come from both merchants and platforms as well as manufacturers, etc.

Overall, the trend should be expected to be towards more interest-bearing loans. But we're certainly still very much in the business of finding ways of offering consumers magical deals that contain no interest at all, which is obviously far more valuable now that the overall borrowing cost for consumers went up a lot.

Operator

Our next question is from Rob Wildhack with Autonomous Research. Please proceed.

Rob Wildhack

Hi, guys.

The new guidance, especially in the second half of '23, points to lower volume and revenue growth and RLTC that's actually going to be down year-over-year. I know you stuck to the profitability target, but how are you thinking about the longer-term margin and profitability of the business? How do you get there given that the growth seems to be slowing before you really hit escape velocity?

Michael Linford

That's a good question. We continue to believe that the long-term range of the revenue less transaction cost as a percentage of GMV should be in the 3% to 4% range. You have a couple of factors going on in Q2 with respect to the timing of how we earn the revenue and how we recognize the expense that distorts it. Given the, what we think is a onetime step-up in loans that are held for investment through our warehouse financing growth, we think that obviously will weigh down the full year number but still allow us to end up in the 3% to 4%.

The reason for that is, as we talked about before, the business is really a mix of split pay, paying for volume, which has margins that are much lower, and very profitable longer-term monthly installment. The two mix in a way where we can pretty reliably predict that 3% to 4%.

Additionally, I'd point out that we feel really good about the quality of the assets that we originated this quarter. As I say, the economic content there is really good. That hasn't been a primary driver. Most of what you're seeing is, again, how those yields flow through the P&L.

Rob Wildhack

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