Affirm Holdings, Inc. (AFRM) Earnings Call Transcript & Summary

Welcome, everyone. I'm Rayna Kumar and I lead U.S. payment processors and IT services equity research at UBS. And today, it is my pleasure to welcome Rob O'Hare, Senior VP of Finance at Affirm; and Pat Suh, Senior VP of Revenue at Affirm. Thank you folks for joining us.

Thank you for having us.

So Rob, if we could start with you. For audience members who are unfamiliar with you, can you please introduce yourself and tell us a little bit about...

Sure. I've been with Affirm for about 3 years now, and I sit on our executive team internally and then work across 5 subfunctions within finance. So I cover strategic finance, which does all of our financial forecasting and planning, I lead corporate development, which does all of our M&A work, I lead merchant pricing, which sets our go-to-market records with commercial partners. I lead Investor Relations and then also work across procurement. And before Affirm, I was CFO of a couple of smaller companies, one of which Smart Networks is a publicly traded company, and then started my career earlier in [indiscernible] Planning and Investor Relations at Pandora and Square.

Great. Okay. So starting at a high level, we're now 9 months into the calendar year. Macro has remained fairly resilient, but there are some signs of consumer stress. Would love to just hear how you're thinking [indiscernible] key items.

Yes. Obviously, we keep an eye out on the macro. We're looking at the forward rate curve and always looking at unemployment figures as well. I think one of the nice things about our model and from an underwriting perspective is that we're able to re-underwrite the consumer every time that you get back. So while the macro is, of course, important to us, really, we're actually driving it based on the repayment data that we see. So we don't need to prognosticate too much out on the macro because it is really valuable and really [indiscernible] asset and we're able to course with pretty quickly, and we start to see times of stress from the consumer. And so what we've seen so far is that while there's been inflationary pressures on the consumer and that has created some stress on repayments, employment is still incredibly strong. And the repayment data on our side has been really resilient.

On the U.S. side, core product offerings, long, short interest bearing and 0% APR Pay in 4 parts, interest-bearing products now represent about 70% of your GMV mix. Can you talk about the trends in your product mix and corresponding merchant fee rates over the past year?

Yes. One of the nice things about Affirm is that we're pretty indifferent in terms of this sort of loan products that we offer at a merchant's point of view, we can be really [indiscernible] where we have [indiscernible] So growth that we've seen in terms of the mix moving into interest-bearing has really been driven by some of our larger partners. We also added interest-bearing loans to the Shopify program about 15 months ago now. And so that has helped drive us on the interest-bearings as well.

Got it. You're currently in the process of implementing a higher 36% APR cap across your merchant base. As of July, approximately 70% of interest-bearing GMV was offered at the 36% rate. Can you quantify the economic or potential from this pricing act?

Yes. I think it's important to remember that as we've raised the APR cap, we're going to start to see new originations benefit from that higher cap, but it will take a couple of quarters for the entire book [indiscernible] recap study, [indiscernible] predate the cap at some of these larger merchants to some of these programs. So I think the rough math is that as we move from 30% cap to the new higher 36%, APR will -- you'll have to apply sort of the weighted average life of our loan is about half a year. So it won't be a full 6 points if you denominate it on a GMV basis, it will be about half of that. And then ultimately, we haven't guided to a terminal rate for how much of the portfolio will move to the cap, but we think we have a lot of headroom still from the 70% that we were at in [indiscernible].

Got it. That's very helpful. Pat, let's go over to you and maybe just like Rob, if you can just introduce yourself, give us a brief background and tell us a little bit about your role.

So my name is Pat Suh, and I am the SVP of Revenue at Affirm. I've been at Affirm for about 8 years, which in dog years is quite a long time. But I managed the client success teams and the sales client success, [ Merchants ] team, so our field teams that meet with our merchant partners today. Previously to Affirm, I was working in SaaS Security and SaaS similar to IT was at Microsoft for quite a long time, actually in New York. So covered a lot of the bank here as well. So it's a good merger of financial service agreements and technology. Really happy to be at Affirm for a while.

So Pat, maybe just talk about some of your initiative that you're focused on in the near term?

So as Rob kind of talked about some of the products. We're very excited about the low AOV space [indiscernible]. So our bread and butter has been highly considered -- purchase is higher average order values, but we've been moving over the last few years into the space [Technical Difficulty] top downloaded apps -- very excited about really expanding into these smaller item purchases. We're also looking at expanding in the categories, other categories such as health care, groceries or are you looking at expansions there. And spending our reach into those broader categories. Also looking at in-store. So [indiscernible] with card and expanding into the properties, I mean 85% of sales is taking place in the store. So not that our products in the card. So we're excited about those expansions. And then finally, our distribution partnerships. So we continue to work with like Amazon Pays, [indiscernible], where integrations become very easy. These are platform plays where someone can enable on your [indiscernible]. So those are all our main initiatives for the next 5 years.

Understood. Can you talk a little bit about...

Yes, I think as we look at BNPL and probably a couple of ways to segment it, but like Pay in 4, that's probably where it's hypercompetitive where you're probably seeing this to the past. That's where most of our competitors are. So that continues to be competitive, mainly because there's less barrier to entry, it's underwriting to be honest. So we're seeing a lot of competition there, those that are able to enter the market where we've been sort of having our competitive advantage or traditional higher average order value space, because of our underwriting, because of our decade of experience in this. And like Rob was mentioning the payment data, et cetera, we're able to underwrite better than anyone else, we're -- competitively we're the leader. Anything that's a higher average order value and considered purchase. So competitively, we still see cost [indiscernible] there. And I think lastly, like even with the card, I think we're being quite innovative. So competitively, where we're really fishing the envelope and what we're doing.

Could you see as your competitive [Technical Difficulty].

I think there's actually a gap we sell between, say, private label credit cards and credit cards and debit cards, we're a unique offering that allows a debit card user [indiscernible] to manage the cash flow that ability -- to manage the fund flow. And then you have the physical card that you've taken. So really, we don't see many competitors at all.

Okay. [indiscernible] international expansion opportunity and how do [indiscernible] international markets that you're looking at compared to that as well? Yes.

We're still -- yes, we're continuing to look to expand I think the U.K. will be first on a radar as the next area that we've announced for expanding into. And we're always looking for new region, we can expand our range. As I look at the differences, I mean, obviously, the U.S. is the biggest market for BNPL, so we've certainly -- we started here, so we're concentrating on expanding our footprint here. Elsewhere, it looks like much more being Pay in 4 and the BNPL players are less longer [indiscernible] to installments that we do. So I think as we expand into more [indiscernible] advantages we have in the U.S. internationally.

Understood. Okay. So Affirm recently announced partnership with WorldPay and Amazon Pay, how does Affirm think about distribution partnerships on longer term.

Very big part of our strategy, [Technical Difficulty] at the integration piece, it's [ cold mill ]. You can act -- it's like integrating with these partners, our integrations with these partners [Technical Difficulty] then their portals to be able to [indiscernible] to turn them on and activate it. So these platform plays, like you mentioned, Google Pay, Amazon Pay, [indiscernible] they're all native integrations that allow me to just flip it on. So when we think about the long-tail base, very easy to activate no integration on their part, lessens our time to market with those partnerships.

Understood. [indiscernible] spending for Affirm? And how does Affirm start to win.

I think in-store is definitely a big part of our expansion. Like I mentioned, the 85% of transactions in stores. So we are continuing to invest there. I think the 2 main strategies we require [Technical Difficulty] BNPL in that in fiscal factor that take in-store is just really powerful, great limited less [indiscernible] familiar form factor. And from a merchant perspective, there's no training involved really and having took [indiscernible]. And then native of sale integration with the Shopify in-store, allow and very quickly at any point-of-sale system that people provide the stores. So those are the 2 pieces of our interest.

Got it. Rob, I want to move over to you and this is also about the bank card represent some meaningful opportunity for you as Pat has mentioned as well. You had in the quarter an increase in the card users [indiscernible].

I think really, it's a decision on our side. We've got -- we're fortunate to have a bit of active consumers of about 16 million. Affirm is very much a product we're driving that product into the base of consumers that already know as Affirm. And so in up to us to sort of roll that out, and we've done a lot of work behind this to make sure that we get the product like -- I'm afraid that we get the conversion funnel right when we without being a lot of card to a user. And so [indiscernible] we started [Technical Difficulty] and grow the card users.

Got it. And do you think this is sustainable going forward that we saw in the previous quarter?

Yes. We've been pretty steady. It was pretty steady over our fiscal fourth quarter, which ended in June, and we're really excited about the uptake that we've seen and just the usage that we've seen was flat.

Understood. As of the fourth quarter, 80% of Affirm cards are GMV and 50% transactions were in the form of interest-bearing loans, how do you expect the Pay Now versus Pay Later mix to evolve over time? And how should this impact your RLTC margins?

Sure. And maybe just to give a quick primer on the card. So the Affirm card sits on top of a consumer's existing bank account. And then from there, there's effectively 3 different ways that a consumer can use Affirm card. So first 2 [indiscernible] PayNow. So these are -- twice the economic model for Affirm there is that we collect nonregulated interchange, so a much lower take rate than we see in the rest of our business. But that's very much a new service area and a really large opportunity for Affirm. And so we found a way to make sure that those transactions are down accretive to Affirm overall, and we'll still make small margin there. It just won't be at quite the same profile, but we think that adds a lot of frequency, if we're successful with that part of the card, we expect to have the [indiscernible] top of wallet and drive a lot of engagement with our base. And then over the -- what we call Pay Later transactions, it's really a mix of 2 product types. It will be some Pay in 4 transactions, and then as we posted in Q4, part of the maturity [indiscernible] interest-bearing loans. And so how we defer the financing side across Pay in 4 and interest-bearing, I think we've got a really good model to optimize those transactions to make sure that economically, we stay in line with the rest of the portfolio. And so if we are fortunate to see more PayNow volume, I think that will drive really nice frequency within that consumer base, and we think that's real positive, but it could result in slightly lower economics overall card, but I don't think it would be a meaningful drag on the portfolio.

Got it. Okay. With the exception of Affirm card, Affirm has primarily focused on consumer lending products for some of your competitors like PayPal and Block, so Buy Now Pay Later product offerings are just 1 part of a broader financial services ecosystem. Have you contemplated making big portions and more traditional financial services and payment solutions there?

Certainly. I mean, we're still really early in the journey on the Affirm side. We haven't shared too much beyond card. So I think card is really the next product initiative that we want to drive in fiscal '24. And I think card shows that we want to mean something to all of our consumers' transactions, whether it's finance transaction or everyday spend. And so I think we still got an incredible opportunity to optimize that product next and got some interesting things going on the international side down the road. And so yes, that's where we're focused right now.

Understood. The direct-to-consumer business represented about 25% of your GMV in FY '23. Can you talk about the importance of your direct-to-consumer business and spend some time discussing the economic [Technical Difficulty]?

Sure. Yes. I mean, I think the great thing about consumer business is that it shows where Affirm sits in the shopping journey for a consumer business. The majority of the transactions on the direct-to-consumer side are really starting on an Affirm surface. And I think that's really compelling when we were out talking to merchants and talking about incrementality that we can bring to merchants large and small. The nice thing about direct-to-consumer also is that the second use product. Most consumers don't start their journey with Affirm on our direct-to-consumer services. It's something that they find after they've discovered Affirm at a point of sale with an integrated merchant. And so because we're working with a base of consumers that have proven themselves to be good borrowers and to have paid us back, there's inherently less risk in direct-to-consumer transactions. We've sort of taken out some of the risk that with the first transaction consumer. So that really helps a lot on the economics of the direct-to-consumer side, that's been true with our Affirm Anywhere product, which runs on a virtual card, and that will be true again with Affirm card as well. So we really like that cohort of users, it's a way to drive a lot of engagement with a base of users that really trust Affirm and love the ease of use that...

Understood. Enterprise partnerships are obviously a key component of Affirm's growth strategy. Looking specifically at Amazon, Shopify, you've now been with the platform for a few years. Can you talk about how these relationships are progressing? And what is the remaining [indiscernible] with Amazon and Shopify?

Yes. I think there's still tremendous potential at both platforms. You look at BNPL in the U.S. at large, roughly a 60% penetration are commerce and we're nowhere near that penetration rate yet at either of those platforms. So we think that there's an opportunity just to sort of catch up with the rest of e-commerce as we continue to optimize and scale those programs, Shopify in particular, we extended that relationship early last summer. And with that extension, we also expanded into interest-bearing loans. And I think that's a really good model for how we think about the opportunity with all of our large partners. If you remember, Shopify started as a Pay in 4 only offering, and then we added interest-bearing to complement Pay in 4 about a year into the relationship. And so we would love to bring that model to all of our large partners where oftentimes, a large partner is starting with a single loan product, and then we can expand into Pay in 4 or add interest-bearing for Pay in 4 only products. So that's really the place to run and to make sure that with the entire product led to merchant and optimize it to fit within the context of their business.

There are other large partnerships that we can expect to hear about in the near future and replicate some of the work you've done with Amazon, Shopify?

I mean I don't think there's anything quite at Amazon scale or even Shopify's, but we always have -- Pat always taking to merchants, we always have a pipeline that we're really excited about [indiscernible] there, but nothing to announce today.

Understood. Sticking with enterprise, can you talk about how the economics and product offerings differs with these large e-commerce platforms compared to some of the smaller individual merchants?

Yes. I think because we have such a wide breadth of product offerings, we can really need the merchant where they are, right? Some merchants are very cost sensitive in which case they want a lower cost, for us probably interest-bearing offering, interest-bearing [Technical Difficulty] merchant discount rates. Other merchants are more focused on driving incrementality or they may be selling higher ticket item or a higher margin item and they're more open to partnering on things like 0% APR, which in that transaction, we're only monetizing the merchant side of the thing. So merchant will pay us higher MDRs in that situation. So yes, I think we've, like I said, sort of expand the offering with Shopify. We've done that in a profitable way. And then similarly, with Amazon, Amazon historically has been an interest-bearing only product, but we don't think that, that's an end state for the relationship.

Okay. We can now open the floor for questions from the audience. We have a mic going around? If anyone has any questions, please raise your hand and we'll bring over the mic. Okay. Hence we don''t have, I have plenty of more questions, that's fine as well. More time for me. Rob, your 2024 GMV guide implies a deceleration in growth, the same low improvement rate like [indiscernible]? Are there any macro indicators that would make you more constructive on your approval rates. For example, if that pivoting is interest rate policy, we think investors are looking for catalysts to drive GMV acceleration here?

Yes. As I mentioned, I think while we're obviously tracking all of the macro indicators, we really start our underwriting decisions with the repayment performance [indiscernible] accordance. And that for us is oftentimes the best signal of stress [indiscernible] strength in the consumer base. So that's going to dictate how to [indiscernible] that we set the credit cards and how we underwrite the [indiscernible]. Really the data, I think, is going to dictate.

I know you have the upcoming Investor Day. Can you talk a little bit about what we should expect to hear?

Going to be a little coy there. I mean I think we're really excited to obviously share a bit more about card, which has been very top of mind for investors since we've announced earnings. In the last Investor Day, we did give an update on some of the economics in the business and how we expect to operate from a growth and profitability perspective. So I would expect that those are some [indiscernible] for the event, but don't want [indiscernible] too much.

Okay. And both of you have spoken about some [Technical Difficulty] that are important at Affirm, do you openly maybe answer on how this M&A potentially play to some of your strategies?

Sure. I'll start there and then Pat can fill in. I think if you look at the M&A that we've done at Affirm and we've been relatively [indiscernible] I think the most successful deal that we've done was really PayBright, which was a market-leading BNPL provider in Canada. And Affirm is playing in such a large base being a U.S. market leader that oftentimes it can be hard to prioritize the work needed to launch a country. And with PayBright, we were able to buy entry into what is a really important market in Canada. And I think if we were to do future M&A, it would certainly consider buy versus build approach in some of the international markets that we think are interesting. So I think that's maybe the easiest 1 to point to. Within corporate development, we also view our role as being an extension of the product road map. And so many things here and so [indiscernible] that are some of the interesting areas that are maybe below the line for that team and out talking to potential targets as a way to augment the in-house product resources.

Okay. Fair enough. I want to go back to the competitive landscape. And you both explained really well that the advantages that Affirm has in the market. Can you talk a little bit about who you actually view as your main competitors there in the different segments of your market? And how often do you run into blocks after that?

So I mean I can start there, well, I think what we segmented earlier, I think for Pay in 4, the traditional folks that you've seen, Pay in 4 like you mentioned -- we -- those are -- from our perspective, we differentiate in a way where we offer the Pay in 4 offering, but we also offer installments. And so it's almost like with these added extension in the future. So what Rob kind of mentioned was Shopify, we launched with Pay in 4 initially, but then expanded into interest-bearing installment loans or longer-term loans. That's where we're very differentiated. So when we look at there is no one has that offering. So we might compete on the Pay in 4 space initially, but then we always look to kind of expand and broaden our offering, that really resonates with a lot of merchants there. We want to have the broader spectrum offering. So even when you look at a team that we launched recently, the average order values are probably less than [indiscernible] today. We're seeing pretty healthy margins -- I mean, as -- where people are bundling these lower price tag. So for us, we feel like Pay in 4 is just 1 piece of BNPL, we're able to offer a lot of order offering to our merchants. So that's been helpful.

Yes. And I would just add, I mean, if you think about the breadth of our product offering, that's interesting in and of itself, but it also means that we can profit by monetizing into interest on the 1 hand, and we're not dependent on purely monetizing the merchant side of the equation like Pay in 4 model would be. And so I think that's really interesting that will be [indiscernible] for this less in some of the enterprise dimensions that we're part of. It also means that we have, I think, a pretty differentiated consumer base would prepare us to an after pay or a corner because they're predominantly in Pay in 4, we bring a base that may have a different consumer type. And so that gives us the ability to be incremental to either of those platforms. And some of the opportunities that in the market today, there is a side-by-side approach where the merchants could be looking to bring on an incremental second or third provider. And I think our network of consumers is really unique.

And Rob, you alluded to this before, as we both mentioned, some of your competitors were offering more [Technical Difficulty] financial products, and you said in FY '24, you have a key initiative. Could we expect announcements of newer consumer products throughout the coming months?

I think we're really heads down on card and making sure that we maximize the card opportunity and then get it right, get it right with our consumers, and then continue to invite new consumers to enter into that product set. So I think you should expect to see continued progress on the card front, that's -- that's what I expect to share in the quarters.

Okay, fair. All right. I know we only have a few minutes up, so I just want to ask both of you a final question. This is actually, maybe it's 2 questions. What are your thoughts to most excited about is coming in on Pay in 4 or [indiscernible].

Well, I've got to do it for us. I mean, I'm very excited about the card. I think as I mentioned, it just unlocks just to welcome different channel for us. It's something that's very exciting in the merchant base [indiscernible] really asking about how they can leverage the time of the card within their stores and within their marketing. So for me being at Affirm it's exciting which is innovative product. And so that keeps me going on -- especially after 8 years, just being excited about product offerings and what's coming and I really do think we're changing the way people are shopping with Buy Now Pay Later and with our products. That's what is feeling. I'm certainly worried about the macro pieces. I mean less worried in some of the sense that Rob is talking about for our business, but with the consumer is pressured today, merchants are pressured, there's a lot of these external forces. So how that affects -- trying to understand how that affects our merchants and being able to tailor our solutions for that. We see -- we've been able to navigate that. But yes, it is always overarching concern.

And on my side, I would echo as excited about card and then I would also point to the fact that we delivered adjusted operating income profitability in Q4 and then gave guidance for fiscal '24, that we'll do the same on a full year basis. So I'm really excited to execute against that plan and to deliver results in the coming quarters. Yes. And I think in terms of worries, I mean, really, it is such a tremendous opportunity, right, like making sure that we prioritize the right things at the right time to make sure that we maximize the BNPL opportunity here in the U.S. and then also in new markets as we have to...

Great. Well, it's wonderful having both of you. Very insightful. Thank you.

Thank you.