Affirm Holdings, Inc. (NASDAQ:AFRM) Q3 2024 Earnings Call Transcript

Affirm Holdings, Inc. (NASDAQ:AFRM) Q3 2024 Earnings Call Transcript May 8, 2024

Affirm Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Affirm Holdings Third Quarter Fiscal 2024 Earnings Call. Following the speakers’ remarks, we will open the line for your questions. As a reminder, this conference 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. In line with our practice in prior quarters, we will begin with brief opening remarks from Max before proceeding immediately into Q&A. On that note, I will turn the call over to Max to begin.

Max Levchin: Thank you, Zane. Thank you for joining us today and taking interest in our journey and our mission. As you can tell, we’re trying something new, a pre-market open earnings call, live from New York and our awesome remote work be damned, very well-attended office in Manhattan. We’re excited to see some of you in-person later this week. But for now, as you can tell, we had another excellent quarter. It’s all in our note. So let’s jump straight into Q&A. Back to you, Zane.

Zane Keller: Thank you, Max. With that, we will now take your questions. Operator, please open the line for our first question.

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Q&A Session

Operator: All right. Thank you. Our first question comes from the line of Rob Wildhack with Autonomous Research. Please proceed with your question.

Robert Wildhack: Good morning, guys. Maybe one on the quarter and then one bigger picture question too. But near term, the slides called out that the majority of the benefit from pricing initiatives will be realized by the end of this fiscal year. That all makes sense, but wondering if you could quantify how much the pricing initiatives have been helping volume growth in recent periods?

Max Levchin: It’s hard to quantify to be completely honest. We don’t couple these measures super tightly because it’s very dangerous to decide that one thing leads to the other. So we have a wider EPR range, obviously it served us well in the world of increased rates, but we still underwrite every transaction, we still decide which transaction is going to be not, et cetera. And so I would struggle to put a distinct number on it, certainly wouldn’t want to make any prognostications about the future impact. Obviously, we are very keen on growing. We’re still growing really well. We benefit from pricing quite nicely, but ultimately, we are in the risk measurement and management business here. And so we will first and foremost do no harm to that as we grow.

Michael Linford: Maybe one thing I’d add, if you look at the letter, we bridge for you the year-over-year change in our revenue less transaction cost measure. And you can see that the revenue growth roughly offsets the increase in funding costs, other transaction costs and the incremental provision costs. And the real governor here for us is making sure that we post positive unit economics. And so the way to think about it is the revenue was what we did to offset the change in rates in the business, and we feel like we’ve done that. It allows us to be back to more business as usual.

Robert Wildhack: Okay. Thanks. And then bigger picture, Max, you’ve talked a lot about unbundling the credit card. But elsewhere in the industry, you’ve got Capital One tying up with Discover and kind of a rebundling of the credit card. So I’d love to get your thoughts on how you think that could impact the industry more broadly? And then also if you see this kind of rebundling as a new or unique competitor to Affirm in any way?

Max Levchin: First of all, I think that is singularly the most impactful and interesting thing that’s happened in financial services probably in the last 10 years. So a huge goodness to Capital One for seeing the opportunity and executing on it like nothing but extreme respect for the leadership team there for just being having the hoots and boots to go do this. I think creating another network, given Discover’s reach is especially powerful and so lots of good things to sort of — from their point-of-view I think to do that. I think any incremental network building, whether it’s open or not entirely open is a good thing for us because it just creates more plurality in a market and validates the idea, frankly with even our investors that there’s still a chance to build another giant network.

That’s certainly the business we’re trying to have here. I’m not sure the products that are intended to run on top of the newly — whatever the name is going to be Discover Capital One network is meant to be any different from what happens currently on Visa and Mastercard. As you know, ours is fundamentally different. We look at SKU level data and integrate directly with merchants at a much richer degree of bandwidth to make sure that we can underwrite transactions and equally importantly, offer EPR subsidies to consumers to motivate purchasing. So I think the network itself is a little bit more of the same, but I do think that the actual deal is a profoundly interesting thing, certainly from a Capital One point of view.

Robert Wildhack: Great. Thank you.

Operator: Thank you. Our next question comes from the line of Jason Kupferberg with Bank of America. Please proceed with your question.

Jason Kupferberg: Good morning, guys. Thanks. So just coming off very strong GMV growth performance here in the quarter, obviously, well ahead of your guide, up 36%. I think the midpoint for the fourth quarter is implying more like 25%. Year-over-year comp is a little bit harder, but I think from a seasonal perspective, you might expect typically stronger quarter-over-quarter growth in GMV in Q4 than what’s implied in the guide. So just wondering if there’s any particular callouts or any plans to tighten underwriting or more cautious view on the consumer or just any additional color there would be great.

Max Levchin: I’m sure Michael will have some words in a second, but let me tell you how I feel. We don’t run the business on a quarter-by-quarter basis. It is just a fundamentally wrong way to look at a payments company that wants to be around 100 years from now like what are you going to do next quarter, like we’re trying to grow, we’re trying to make sure that we grow really well, yet carefully we take risk. But most importantly, the fact that we have a forecast to share with you or guide to share with you for next quarter has barely a little impact on our planned growth initiatives on some randomly chosen time boundary that is not measured in quarters. And so I think it’s just really important to know that I certainly do not think of Q4 numbers through from a growth point of view.

Like I definitely care about other numbers like risk, et cetera that’s really important. But growth is measured in years and that’s certainly how we think about it from a product point of view.

Michael Linford: Yes. And then just a couple of things about the quarter. So fiscal Q4 is a seasonally stronger quarter. We see strength in categories like travel and ticketing, you see that reflected in our guide. Our guide at the high-end does imply faster year-on-year growth in Q4 of this year than we had on last year. So that’s a year-on-year acceleration in growth. And of course, last year, the Q4, as you point out, was a pretty tough comp because it grew quite quickly from Q3. Some context there as we called out in our shareholder letter last year, we did have some new deals with travel merchants like Cathay Pacific and Booking.com and we had some expansion projects with merchants like Royal Caribbean. And yes we also launched the adoption of 36% APR caps in many merchants.

And all those things contributed to a really strong Q4 last year making the comp quite hard. If you look at a two-year growth rate, the higher — the high-end of our guide implies about 58% growth, which is a slight decel from Q3, but really isn’t all that material.

Jason Kupferberg: Okay. No, that’s good. That’s good color. I wanted to also ask just on Affirm Card. I think it said in the shareholder letter that the recent cohorts are actually using the product more than some of the initial cohorts. I think conceptually we might have thought that the early adopters would kind of be the heaviest users, but just curious to get your take on that, Max. And then just any thoughts you guys might have on how card GMV might trend in Q4? Thank you.

Max Levchin: So great question. And that is definitely something that I keep a much closer eye on than even quarterly measure. This is a day-by-day, week-by-week. My last conversation before I walked into this one was with one of our card leaders right outside this room, just to give you a sense for where I spend my time. So you’re totally right. It would seem to reason that early adoptions would just convert and put their card — put our card top of their wallet and go, go, go and you should see some normalization. That has not happened. I didn’t necessarily predicted that way, but the reason for it is simple. I didn’t — I didn’t say one of the analysts notes said it, but it’s a unique product. Every time you launch a unique product, you are teaching the market or teaching the consumer anyway a bunch of new modalities that they have not experienced yet, which is for some people full there and for some people the vision that they’re trying to pursue and I hope I’m in the latter, but perhaps sometimes in a former category too, as you offer the product to the market, you get consumer feedback.

And we have a million cards out there now with lots and lots of feedback and some people love it and some people have issues, which we are very attentive to. The last quarter, we launched uncountable number of tweaks and fixes to the user interface, most importantly, and just made the card more and more comprehensible and easy-to-use and easier to understand and just eliminating surprise user experiences in and. And so as we do that, we find another point, another three points of usage where people say, oh, okay, so now I get what I’m supposed to do at a gas station or now I’m supposed to do this in a restaurant. And like these are real examples, like a restaurant pay later mode is a little bit trickier because you might leave a tip. And so the number you see on your bill is not the same number, etcetera.

And so as we just go and make the card smoother and smoother, we find new usage. That’s why we think the usage increased. One interesting stat, we were roughly 6% pay now. Last quarter, we are closing in on 10% pay now this quarter. Still incidentally, those are not top of wallet numbers. That’s still climbing, but that’s a really good clip and we’re going to keep growing until we get more. We think there’s a lot more consumer spend to capture from the card and that’s certainly what we are aiming for.

Jason Kupferberg: Thanks, Max.

Operator: Thank you. Our next question comes from the line of Dan Dolev with Mizuho. Please proceed with your question.

Dan Dolev: Hey, guys. Thank you for taking my question. I just have one question. With rising interest rates, I’m actually surprised to see how resilient GMV is and margins are going up. Like what is — what is driving this resiliency? I mean, it’s pretty amazing to see that. Thank you.

Max Levchin: Thank you. That’s a very nice compliment. So we’ve said it before, I sometimes tweet about it, but I’m not sure people read my tweets, maybe a good thing. Hire for longer is okay with us. We are not super rate sensitive so long as rates move in subtle increments, 25 bps up or down just doesn’t change our cost-of-capital in a dramatic way. And our resilience is not a secret. It’s just the fact that the business isn’t ultimately all that sensitive to minor rate movements. So I think other lending businesses behave differently. Ours has this really nice property where we are just not that rate sensitive and we are very, very comfortable operating the business at this growth at the rate that the Fed has set for us and we’ll continue growing with or without rate cuts.