Affirm Holdings, Inc. (NASDAQ:AFRM) Q2 2023 Earnings Call Transcript

Affirm Holdings, Inc. (NASDAQ:AFRM) Q2 2023 Earnings Call Transcript February 8, 2023

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. 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.

With a smaller, therefore, nimbler team, we are focused on achieving profitability on an adjusted operating income basis as we exit fiscal 2023 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. Anybody wants to ask me about the recently proposed rule on , 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.

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Q&A Session

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 will sort of 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 bit more complicated than, in some cases, any way 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. So 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 is 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, et cetera.

So it’s a matter of underestimating complexity on our part. And the other unfortunate reality is that having these conversations in calendar Q4 with merchants is just not something that happens very quickly. So we don’t have much risk in those conversations, but the timing made a little difference. And 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. So in thinking about the impact on the top line and the top of the funnel, we don’t think there is a measurable impact there.

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 kind of 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 hadn’t seen in the past. Could we expect that to kind of come in?

Max Levchin: 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 zeros. That said, the subsidies to reduce the rates or eliminate them entirely come from both merchants and platforms as well as manufacturers, et cetera. And so 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 2023, points to lower volume and revenue growth in 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? And how do you get there given that the growth seems to be slowing before you really hit an escape velocity?

Michael Linford: Yes, that’s a great 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. I think what €“ 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. And given the €“ that what we think is a one-time 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%. And the reason for that is, as we’ve 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 and 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. And 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: Thanks. If I could just follow up there similar question but more from an operating profit standpoint. The long-term target, I think, used to be a 20% or 30% operating margin when GMV growth was below 30%. You’re kind of there now, but still have a lot of fixed costs to scale. So from an operating profit standpoint, how do you think about the longer-term margin here?