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

Never say never, but we're pretty far from saturation of the card within our existing base. And so it's very hard to justify a spend of any size other than -- so we constantly test market. Every time I say we never market anything in spirit is 100% true. Dollars and cents, it's like 99.5% true. We run -- we're not so proud of -- we know our way in no other way is interesting. We constantly test and try to find out the answer to the question, all right. So if we wanted to go market a thing, what would be the cost of acquisition. We are extremely fortunate to be promoted by our merchant partners at their point of sale, effectively resulting in something that resembles zero CAC. That's a great business if you can have it, but it doesn't obviously need to know what that CAC would be if you chose to advertise. And so we know what those numbers are. They're not nearly compelling enough for us to go spend any meaningful money. We'll continue testing. And at the point where these things become -- these things being a possible CAC becomes somewhat interesting, we'll do more testing. But for now, we've underwritten 70-plus million Americans. We've transacted with 50 million-ish, the active numbers last trailing 12 were 26 million, 27 million, if I remember correctly. So that's a lot of consumers to give a card to that have a very real relationship with. By the way, when we count actives, unlike some of our esteemed competition, we're only counting people who have initiated a transaction in that period versus have been coming to our app to pay us back. So the actual addressable base at any given point is very, very large. And the active card base as big as it is, it's not even 10 million. Like it's a long way before we start saying, "Oh my God, where will the next card consumer come from?" So never say never. I think the more aggressive posture in marketing the card will look like us saying, hey, you've transacted with us once before. You really ought to learn about the card more than the current, which is very polite sort of like we know you're busy, your time is valuable, you're paying your bill. If you would like, there's a door, you can check it out, the card is behind that door. Like we can obviously be a lot more in your face and aggressive. And we tend to be very careful. I was complaining to our team yesterday about not getting enough e-mails from Affirm on Labor Day. And they said, like remember, we practically reach, reach, not frequency. So we're not trying to saturate the airwaves with must get a card. But long before we start trying to talk about the card outside of the Affirm walls, we need to saturate the walls that we have. And that's a very, very large base.

One of the best areas of investment in the card and in customer acquisition is just the surface areas that your products sit on, the way that customers come in the front door and the point-of-sale side of the business. I wanted to maybe talk specifically about the 0% strategy. It's been a lot of focus over the last 2 years. And I want to maybe take a step back because we often get asked about the mechanics for how you scale this product efficiently over the network without going to each individual merchant and negotiating custom MDRs and things of that nature. So can you talk about just the channels that help you scale 0% distribution and make it easier for merchants of all sizes to participate in, whether it's the wallet partnerships, PSP partnerships and so on. And I think it also might be helpful to talk about how 0% offers work on the card when people use the Affirm Card.

There's a lot of there. That's probably several layers in one question. I'll try to hit them all, but if I skip something, feel free to point that out. There's a bunch of different things that have to come together for 0% programs to work across Affirm. So kind of in no particular order, but there's 5, as I'm counting in my head, different technologies that we have to build. So one of the things that Libor likes to say, we embrace channel conflict. So as an active participant in digital wallets and our own card, which we love for people to use and direct integration with hundreds of thousands of merchants and integrations with ISVs and platforms, inevitably, these days, you go to a merchant and there's 3 different ways or 5 different ways to pay with Affirm by going through different doors. it's very important for us that no door is better or worse than any other one. Otherwise, we are actively discouraging a partner from supporting us or promoting us. And so we have an entire initiative called UFP Universal Financing Programs, where, generally speaking, with very few exceptions, if you are at a merchant X and you're trying to pay with Affirm, you are going to encounter basically the same deal. There's some exceptions, sometimes some promotion doesn't get updated in time, et cetera, but that's very much an exception, not the rule. The rule is if you decided to pull out your favorite digital wallet and then put it back in and pull out your card, if there's 0 available, you're going to find it in both places. And if you're going directly, you're going to find it. So that infrastructure has existed for a few years. We built it primarily as we scaled with digital wallet and ISVs and that was quite an undertaking. It's more than just a technology. Obviously, technologically, there's some complexity around how do you settle, things like settlement time, time value of money comes into play, et cetera. The more important piece is the ability to change terms as the terms come up in one source, they need to be reflected in all the other channels. So there's also a legal component where the contracts with merchants, the things that they sign allows us to change these pricing, et cetera, within the confines that they can configure out, et cetera. So UFP is kind of one piece of it. The other piece of offering these zeros is the ability to offer them not as a blanket product. So it's very easy to say, hey, let's just give everyone no interest at all. It will be great. You can imagine that is a very, very expensive fare, especially if we're talking about longer term. So our calling card from the very beginning has always been these long-term loans, where you're not just getting a 0% loan for 6 weeks or 3 months, we will go as far as 4 years sometimes where consumer really pays no interest. And if it is your first time, I range against the idea of deferred interest because I hate the notion of we promise you a 0%, but don't read define print because it might flip and become retroactively compounding some horrible sounding number. And so any time Affirm promises you a 0% loan, it is, in fact, a real 0% loan. You can be delinquent. You can take a break. I hope you don't. But if you take a break from paying us for a year, you'll still eventually pay 0% of interest because that's the promise we make. That's the brand we've built. We are the transparency first lender, et cetera. And so to make sure it is not prohibitively expensive for the merchant who's paying for the zeros, we built what initially was known as Adaptive Checkout, eventually became Adapt AI and then culminated in this thing called Boost AI, which all the acronyms or all the fancy terms boil down to one very specific thing. Any time through any of these doors where Affirm is offered, as consumer goes through based on the best possible highest converting probability anyway, lowest cost to the merchant, that is the offer that the consumer will see. It also has to be synchronized with the advertising the merchant can do, both technically and legally. There's many restrictions around Reg Z has a bunch of things to say about truth in advertising as it pertains to loans being offered. So you can imagine there's a very complex piece of infrastructure that figures out something like if you're going to merchant X and you're looking at a price and it says as low as 0% that typically means that we've already been able to underwrite you and decide that you're almost certainly going to qualify for a true 0%. And that's what you'll see as you check out. So that's Adapt AI and Boost AI together. Finally, not every merchant actually has the margin to subsidize zeros as much as they love them. By the way, 0% loans are fantastically conversion inducing. So a typical impact for a merchant, if they offer 0% for these longer-term higher ticket items, something like an 80% increase in basket size and on the order of 25% increase in conversion. So these are outlier best marketing tool you can possibly imagine. These are also slightly less profitable for Affirm or any lender trying to do this because there's no consumer interest at all. And so underwriting that goes into this has almost no room for error. If you scrub underwriting and you make too many 0% loans or too many low interest loans, you're going to end up with a book that's upside down. And so underwriting is a key underpinning, which is why all these AI pieces have to come in to make sure that we don't offer offers we cannot support. To make sure we have enough margin to actually subsidize enough loans to make this as compelling as I just quoted for these merchants, we ask -- first, we talk to every vertically integrated merchant and say, look, you're probably sitting on a 40%, 50%, 60% gross margin. You would be foolish not to give us 7%, 8%, 9% of it so that we can turn this into a bonanza 0% deals. Some merchants do this all the time, all day long because they love it. If you look no further than some of the famous sports brands or sports equipment brands of yesteryear, they typically run 0% programs the entire year. They don't wait for Christmas sales. Some of the brands that we work with decide that they only want to do this during sales, retail calendar, et cetera. Another way of funding these is what we call BSP, Brand-sponsored promotions. This works really well for general merchandisers that have many, many brands on their shelves, virtual or otherwise, where it's the brand that's actually paying for the sponsorship. So this is now a 3-way transaction. Affirm is underwriting, promoting, pricing, presenting the deal. The retailer ships, fulfills, et cetera, but it's the brand that's kicking in their margin to subsidize the 0% deal. In a normal time or a normal world, this is a 3-way deal that has to be signed every time. Like this does not scale. And we didn't invent this idea. This has existed in banking and cards world for quite some time. But it's typically limited to like a few of these out time because there's such a pain to actually make sure there's a meeting of the mind, so schedule dependent, budget dependent. It also revealed information about who has what margin to offer, which is never a good idea, retailers and brands notoriously hide margin from each other. So we built a platform that allows us to facilitate these deals without revealing too much information while offering all the participants still a lot of transparency into what's happening. If I confuse the hell lot of you with all of this, don't worry too much about it. It works beautifully. I almost quoted the percentage of the BSP 0 volume in our last letter, but decided to hold back, but it's a good number, and it's growing really well. But I'll have one last PS on this one. So everything I just rattled off, if it makes sense, cool. I'm glad you're following it. But it doesn't make sense. Don't worry about it, just yet, BSP is the largest project DT1 is working on. So this is the next big thing that came out of DT1. It's now live enough where it's running hundreds of millions of dollars of volume. So it's far from experimental. I have a lot of confidence that it will scale into a very, very large product for us, and it came out entirely of DT1. So by the time it is at the $1 billion scale, I'll also figure out a way to market it, both to investors and to analysts. The good news is that it markets itself really well to merchants and brands and consumers only need to understand that when they come into Affirm, they see a 0% deal, there's no asterisk. They're not going to get screwed. It's a true 0% deal. And so it's one of the finer examples where the product is easy to explain. The underpinnings are actually very, very complex.

There was a lot there, but I think a lot of it centered on just the creative ways that you guys think about distribution. Maybe pivoting to some of the other distribution channels you have. I think the wallet partnerships have been a consistent call out in the letter, both as a driver of GMV growth as well as a big contributor to active merchant count and particularly nonintegrated merchants and merchants that you don't work with on a direct basis. How do you see wallets contributing going forward? And then how do you think about it both from a volume generator, but also from a customer acquisition channel as well?

I think we've been very fortunate to be partnered with some of the best digital wallets. And the initial expectation for us was certainly it's another door. If people can't go through it and find Affirm where they expect it, that's a problem. We have to address it. And so we mostly came at it through with a point of view of we just have to make sure Affirm is supported inside like fill in your favorite digital wallet. The good and sort of maybe slightly unexpected news is that it has turned out to be something of a growth channel, customer acquisition channel for us, which we've been very happy to lean into and are continuing to do so. If you expand your definition or expand your mind slightly when you think of digital wallets to include some of the more agentic first sort of chatbot interactions, even things that have happened inside some of the browsers most recently, you can pretty quickly see how this could be a huge source of new consumers. There's amazing features inside Chrome and really all the browsers that have come out recently as every one of these companies have prepared for kind of what shopping looks like in a world of AI. We integrate with, I think, all of those at this point, and it's been a great source of both transactions and recently user acquisition. So it's -- I think it's the sort of thing that probably speaks for itself. We can actually test it out and just see how well it works. And I know some of our people, some of Affirmers believe that the best way to use Affirm is actually through one or some of the digital wallet. So it's definitely very much a first class as far as integrations go.

That's great. Another distribution channel that's been a pretty big theme this year has been around ISVs. I think Intuit and QuickBooks in particular, as well as Service Titan. What have you learned from the early innings with these big platform relationships? And I guess, a, how does the product need flex for services versus the traditional retail channels you operate in? And then how do you think about other verticals that are potentially good fits for ISV distribution?

It turned out to be kind of a pretty amazing thing. I mean we obviously knew when we were signing up for trying to partner with folks at Intuit and Service Titan, et cetera. So like we always understood there was a ton of opportunity and came to that with great gust and ideas. The thing that we were kind of blown away by is the richness of use cases. And it's always very easy to say, cool but not today when you speak to, I don't know, cosmetic surgery clinic, someone who runs one of these places will tell you, "Oh my God, half of my volume is financed, and I hate my provider, they're complicated, they overcharge. I don't have any transparency. Consumers don't like them. Would you guys please build something?" It's like, sure, but we have no idea how big it is. Partnering with ISVs gives you this instant sort of very compelling picture like that's a [indiscernible] $100 billion industry. You figure out 1% of that that's a lot. That actually still adds up to the targets of today. And so I see are as much about just gaining volume, partnering with good people, but it's also about learning that things that appear niche as you talk to merchants, and I spend a lot of time talking to merchants and certainly our revenue team does, sometimes would benefit greatly by just zooming out and saying, wait a second, like what is that inside some giant ISV report that we get like, wow, like that's a much bigger than I expected. And so that gives us inspiration to customize the product because we understand just how big the opportunity is. So it did not enter my mind that elective medical was going to be an enormous opportunity for us until we saw just how big of an inside a couple of ISVs actually that serve that industry. And intuitively like, well, it's big, but like how big could it really be? I mean like, actually, it's enormous, and we should be so lucky to go and build the right products for it. And so it's a source of engineering and product innovation for us. We're very committed to partnering more. Now that we've done a bunch of these deals, we actually understand what success looks like. We know where we can go fast, where we have to go step by step. We -- maybe one last thought on that one. I said it before, maybe even from this stage, there's as big an opportunity in what we do in small business as it is in consumer. One of the things that ISVs teach you very quickly is that it really is that big. So there's plenty of B2B products that this genre of borrowing needs, and we'll certainly have something to say about that at some point. Another good detail on project maybe.

Okay. One -- I think our last question probably, but you mentioned before we got on stage, you were fresh off the [ taste ] from London, I believe, 24 hours ago. International expansion has been a big topic, part of the growth algorithm that you've articulated over the next couple of years. You've launched in several different markets, but I think the U.K. is probably farthest along. So maybe talk a little bit about early learnings so far, the market receptivity and just how quickly that playbook can be compressed and replicated in newer markets?

So far, so good. I was just in the U.K. last few days and met with a handful of merchants, some of the larger ones that we have either won, haven't launched or are trying to win. The good news is that we were right when we said that the market wants our brand of products. Obviously, U.K., they well address buy now, pay later market. Australia, where we just launched Shopify is extremely well addressed. That's one of the original players comes from Australia. And so the risk is always maybe they have it all figured out. We don't add a lot of value. That is not the case. In the U.K., the conversation is focused entirely around how longer terms really matter, how they love the transparency, how they love the no late fee posture. They love the clarity we bring to the idea of we will not market brand A to brand B customers just because both are paying us. Plenty of merchants are concerned with leakage of data, the way we sort of built our company, I think, provides a lot of assurance that we will not quietly monetize our own customers against each other. And so I think that's been very successful so far. Obviously, U.S. is still growing so quickly. It will be a little while before international volume starts becoming a big noticeable part of the overall, but it's going really well. We have a handful of brands we're excited to hopefully bring over the line in a minute now. And we're definitely fully committed to it. One of the major things that we did organizationally, we have now created a role of an SVP whose sole job is driving international strategy across the globe from the top, which -- it's not like we didn't know what we were doing. It's as though we didn't have a strategy, but now having someone who has who wields significant amount of power influence happens to be someone who's been at Affirm also for a dozen years. So having someone who's very senior, this one Pat is going to do great for the team's confidence in our conviction, but also just access to top-level resources. So very excited about that. I'll be back in Europe in less than 2 weeks. So I'm personally involved in a lot of the international work, too.

Hopefully, back in a year and more to say.

Yes, I should hope so.

All right. Well, that does take us time, Max. There's always a lot to cover, but really appreciate the time and all the thoughts on the business, and thanks for being with us today.

Thank you.