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.

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.

Thank you, Zane. Thank you for joining us today and for taking an 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.

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

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

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?

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.

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.

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?

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 huge respect to Capital One for seeing the opportunity and executing on it like nothing but extreme respect for the leadership team there for just having the guts to go do this. I think creating another network, given Discover's reach is especially powerful, and so lots of good things 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 formed Discover Capital One network are 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.

Great. Thank you.

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

Good morning, guys. Thanks. So just coming off very strong GMV growth performance here in the quarter, obviously, well ahead of your guidance, 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 a more cautious view on the consumer or just any additional color there would be great.

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? We're trying to grow; we're trying to make sure that we grow really well, yet carefully we take risks. But most importantly, the fact that we have a forecast to share with you or guidance 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. I think it's just really important to know that I certainly do not think of Q4 numbers 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.

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 guidance. Our guidance at the high end does imply faster year-on-year growth in Q4 of this year than we had 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. 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 high end of our guidance implies about 58% growth, which is a slight deceleration from Q3, but really isn't all that material.

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.

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 of 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 top of their wallet. That has not happened. I didn't predict that way, but the reason for it is simple. Every time you launch a unique product, you are teaching the market or the consumer new modalities they have not experienced yet, which for some people is just getting their footing and for some people the vision that they're trying to pursue. As you offer the product to the market, you get consumer feedback. We have a million cards out there now with lots and lots of feedback, and some people love it while others have issues, which we are very attentive to. The last quarter, we launched countless tweaks and fixes to the user interface, most importantly, and just made the card more comprehensible and easier to use, eliminating surprise user experiences. As we do that, we find new usage points where people say, 'Oh, okay, now I get what I'm supposed to do at a gas station or this at a restaurant.' It's good to note that restaurant pay-later mode is a little trickier because you might leave a tip. The number you see on your bill is not the same number, etcetera. As we smooth out the card, we keep finding new usage opportunities to capture. 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, these are not top of wallet numbers, but that's a really good clip, and we're going to keep growing until we capture more consumer spend from the card.

Thanks, Max.

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

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 driving this resiliency? I mean, it's pretty amazing to see that. Thank you.

Thank you. That's a very nice compliment. We've said it before, I sometimes tweet about it, but I'm not sure people read my tweets, which may be a good thing. Hire for longer is okay with us. We are not super rate sensitive so long as rates move in subtle increments. A 25 basis points up or down just doesn't dramatically change our cost of capital. Our resilience is not a secret. It's just 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 rate that the Fed has set for us and we'll continue growing with or without rate cuts.

Thank you.

Thank you. Our next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.

Hi. Good morning. Max, just want to ask about Affirm Card. I know it was down a little bit sequentially, but it sounds like that was mostly seasonality. Just as we think about the longer picture trajectory of the card and the adoption of the card, how do you think about volume growth on Affirm Card? Just trying to get a sense of what the trajectory will look like given you probably have a pretty good idea what the pipeline looks like.

It is entirely seasonal. That's certainly the correct assumption. I think we talked about it last quarter, so there should not be any surprise. Very happy with the trajectory. We're still not promoting it nearly as aggressively as we feel we could because, as I just said, we have a lot more to do on the user interface and product improvements. I'm not sure I will offer a specific shape of the curve for the card growth just now, given that it's still in this hyper-growth stage. Easier to be wrong than right. But we have a huge number of things to ship there. We're still experimenting very actively with various kinds of rewards. Obviously, you want to be careful with margins, but it's a product that we're very excited about. It has a lot of room to grow. I think a good measure is that we really started to offer it widely about two years ago, and it's now squarely trending towards a multi-billion dollar business. So from a pure growth perspective, it can be a unique case in financial services.

Yes. And the only thing I'd add, Bryan, is if you look at spend on a trailing 12-month basis to capture or to cancel out some of that seasonality, we actually saw spend per user increasing at a pretty healthy clip from Q2 to Q3. So we feel very, very good about the engagement on the product right now.

Got it. Got it. And the adjusted operating margin keeps kind of beating expectations. In the fourth quarter, we're guiding of 15% to 17%. Can you just talk about what you're seeing on the margin? And is that a good jumping-off point as we go into next year? Or are there some other puts and takes to think about?

It's a great question. Yes, I think this year has been a real year where we've been able to drive meaningful operating leverage in the business. That's a function of us really driving strong growth in our unit economics with revenue less transaction costs growing very quickly and our flat or even reducing fixed operating expenses. We would expect some of those trends to play out. However, we do still feel very optimistic about the opportunities ahead of us. So there are lots of exciting things that we're working on that will need resources. We definitely do not want folks to think that we're going to be much above our framework that we gave investors in November. We believe we continue to have revenue growth rate numbers that are well above our 20% threshold that we put out there in November and would expect to live within the adjusted operating income framework that we put out in November.

Okay. Thanks for the color.

Thank you. Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question.

Good morning. Thanks for doing this this morning. I appreciate the call out on increasing exposure given the credit performance and the yields you generated right now, which seems like could create some potential for near-term delinquency increases. But I'm wondering, is there a framework of how we should be thinking about GMV versus credit right now? It seems like if we look at the 30-day plus delinquency rates on some of your prior deals, that there's still a fair ways to go to higher watermarks. So just how should we think about that balance of driving volume growth versus where some of these other delinquency measures and credit measures may move?

Good question. Thank you, James. What I meant in my notes is that we are over-earning, as Michael would put it, which means that we have capital to invest in growth. That does not necessarily mean loosening. In fact, summer in particular is a seasonally high delinquency rate time, so there will be undoubtedly seasonal fluctuations in delinquencies, more likely up than down. We’re very, very concerned with delinquencies at any time just because that is the single most important part of the job here. But having a little extra money on hand to invest doesn't always mean let's take a little bit more risk. What it does mean is that we can invest that in APR subsidies, which favor higher credit quality borrowers and create a positive selection bias in the credit portfolio. We still maintain an extremely vigilant watch over credit. As we've always said, we don't use credit as a growth driver or limiter. Credit is something we manage entirely discretely. There's no conversation about if we tighten a little bit, the growth will slow down. We want growth as much as we can responsibly handle, but not before we have credit results that we like and most importantly, that our capital markets partners like.

Great. That's a great answer there, Max. I wanted to ask a follow-up on the Affirm Card and clearly a lot of work is going into the user interface and points where you can reduce friction. In previous comments, you've talked about some of the things that you're doing on the customer service side and I think have also called out even using AI assistance to help improve those customer support costs. I just want to hear from you where we're at on that process and what additional things can be done to bring down the cost of support versus reducing upfront usage friction and where you feel like you're at on that process.

Great complex question to dive into. On the card, I think I mentioned this before, so it shouldn't come as a surprise, but we have a work stream called SUEX, which stands for surprise user experience. The card is a new product, and there are plenty of surprises that we do not want our consumers to experience with the card. We've been busy polishing the rough edges. That's a long list. If you use the card, you will see what we've done there. Some of it is very apparent, and some of it is a bit more sophisticated. Just to give you a glimpse into this, because the card sometimes runs over Visa rails and sometimes runs over our own, there are situations where you have to match a transaction or someone might want a partial refund. The logic around transaction matching going back sometimes 30 days is fairly complicated. The more intelligent you are in transaction matching, the better you serve someone who calls your customer service and says, 'I have to cancel a transaction; it showed up not as described.' If the data is readily available, the call will go faster and the consumer will be happier. That sounds like a small thing, but it's a major cost reducer. There are many other areas we are working on. On the AI side of things, we focus on making sure our AI strategy is about implementing technology that is real and not just a PR statement. We've been investing heavily in intelligent chat interfaces that GenZ consumers really love to interact with. Our investment in AI is aimed at ensuring the customer feels confident that they are in good hands. It’s early, and no one has yet lost their job due to AI at Affirm. That's not a short-term cost saving, but it will allow us to scale our customer service operations effectively over the next few years. We expect consumers always to be able to reach a human and once they do, we want them to hear from someone who understands what's happening with that particular account or transaction. We can prework a lot of that with AI, and so that's where we're spending a lot of our time, and we are very excited about that.

Thanks for that.

Thank you. Our next question comes from the line of Reginald Smith with JP Morgan. Please proceed with your question.

Hey, good morning and congrats on the quarter. I had two questions. The first, and I'm not sure if you guys have disclosed this, but I was curious if there's a way to talk about where you're seeing your Affirm Card or the type of customers you're resonating with your base, thinking about income or credit the band. Is there a way to kind of talk about that? Where you're seeing traction in particular in any given segment? And then I have a follow-up question. Thank you.

Two questions. Obviously, this is essentially a transaction card or a transactor card for habitual revolvers. I think that's probably the best way to describe the near-perfect product market fit with the card. We aim to address many other bands of credit, but the idea of someone saying, 'I don't want to be in debt in a way that I can't predict. I like the ability to finance some things and not finance others very explicitly,' that is the purpose of the card. That's the marketing message. That's the story we tell to our consumers when they ask, 'Why do I need to have the card?' The user says, 'Some things need to be paid over time, and some need to be paid for right now, and I don't want to mix the two.' That's the buyer we have today, and you can see that in all the stats.

Okay. That's helpful. And then thinking about you guys breaking out quarterly the number of new transactors, you also give a mix of volume. I was curious and my guess is that it probably doesn't track your volume mix. But if you were to think about where your new customers have come in, whether it's paying for core zero or installment, what's that mix? And then the second piece of that question is, in instances where you're not the only BNPL solution on a website, how does that impact new user adoption? Is there any slippage in your impact from being the exclusive BNPL provider on certain platforms in terms of acquiring new customers, if that makes sense?

Yes. It's a good question with a lot of depth, I'll start. I'm not sure if Michael has some stats he'd be willing to share. In terms of exclusivity versus not, we don't need exclusivity to win. We are comfortable being right alongside other BNPL providers because we offer products that are quite unique. Wherever adaptive checkout shows up, that generally speaking matches the particular customer base needs and our ability to predict what might be best for that user is really good. We have underwritten 50 million people in the United States alone, so our brand speaks for itself. We are unique or mostly unique at this point, which is good, as we don't charge late fees, we don't compound interest, and we don't have deferred interest. Our customers know who we are, they seek us out. Even those who don't have an Affirm account yet understand what Affirm stands for. I think it took a long time to persuade the market that we mean it when we say there are no hidden fees, but that seems to be working now. In terms of exclusivity, it isn't a hugely important factor. I'm confident that people who love their brand X competing product probably go through that door, but our users certainly seem to love us. Reading my letter, you can find a little dramatic story about a recent store trip where a woman was just gushing about our service, comparing us to all the competitors. So in an anecdotal sense, we don’t suffer from being side by side with anybody. I don’t know if Michael has specific numbers on new users?

No. I think it definitely tracks where we currently have distribution in the products that we have distributed. Every time we're shown on a product display page or checkout, it's a chance to acquire a user, but it also a chance to reengage existing users. The only thing I would add is that it is the case that when we are launched side by side, maybe as a second or third BNPL product on an existing merchant site, we do see higher repeat rates there. That showcases the strength of our network. Oftentimes, merchants quickly understand that adding us is incremental because of this.

Yes. One other thing I should mention is one of the niceties of being as large as we are is our ability to approach some of these checkouts that were previously exclusive to another player and say, 'Hey, we're not telling you what to do, but we do have 50 million people we’ve underwritten who really like this service; you probably should add us alongside the competitor.' The first fundraising deck I ever put together for this company featured a mockup of a convenience store door that showed Visa, Mastercard, Amex, Affirm. Our ultimate goal is to be a brand that everyone expects to see in a grocery store door. We’re starting to get there, not quite there yet, and I don’t know if we’ll get there by next quarter, as we've said before, we don't run the business by quarters. But that is the future we’re working towards. We are in a place where merchants are starting to say, 'Yes, I should add you guys because there are many people who want to use Affirm.'

No, that makes sense, and I appreciate that. The reason I ask is you're getting a lot of questions about Walmart and then introducing their own thing. And I think it's good to hear how you guys compete or just how viable the product is even with a competing brand button. So I appreciate the color there. Thank you.

Thank you. Our next question comes from the line of John Hecht with Jefferies. Please proceed with your question.

Good morning and thanks for taking my questions. Looking at AOV, I know AOV has been really impacted over the last several quarters by kind of a mix shift from some of the larger transaction partners that you've had. But I'm wondering what you're seeing at the point of sale now and if you're seeing any trends for what users are using to buy now pay later for now relative to where in recent quarters and what that tells you about usage in the future?

I'm going to disappoint you on this one. I don't know if I have any observations to offer. It's important to note that those AOV trends are pretty stable; the ebb and flow based on where we are and the outliers. If you were to segment it, which we do, you'd see it correlate to things like who launched what 0% sale and what new offerings are being sold. AOV tends to trend downward, but that's good as it suggests people are using us for more daily purchases. With the Affirm Card, we want AOV to be approaching typical debit transaction amounts. That's about all I can share.

That's helpful. And I guess maybe product mix, is there anything going on there that's evolving over the recent quarters that gives you a sense of changing customer dynamics?

No, not really. I think we continue to have a lot of ambition to serve as many transactions as possible. Systematically, we have a strong position in higher average order value, more considered purchases; the trend downward from Max suggests a lot of intentional effort. Some show in products like the card where we want to serve as many transaction types, including pay now. Some of that shows up in the kind of distribution we're pursuing, allowing us to serve lower average order value, higher frequency transactions. The fact AOV has moderated a little bit downward while frequency has risen steadily indicates that consumer purchases are where we have a strong position and significant opportunity in serving smaller transaction sizes.

I appreciate that. Thanks.

Thank you. Our next question comes from the line of Andrew Bauch with Wells Fargo. Please proceed with your question.

Hey, Guys. Thanks for taking the question. It's Lamar on for Andrew. I have a follow-up on the Affirm card. This one is specific to kind of penetrating offline commerce and some of the improvements that you've been making to the card over time. Is there any update that you can provide on, I guess, specific usage as it relates to certain vertical segments? Maybe some color on where you're seeing sustained strength and then maybe increasing strength over time from a use case perspective as you continue to make these improvements?

Sure. Generally speaking, as I mentioned earlier, we're seeing a steady increase in pay now, which is good. People are starting to understand the product better. We're aiming to ensure that the card is valuable for everyday transactions like groceries, gas, restaurants, etc. Subtle work is being done to make sure we are an appealing payment option in multi-line checkouts. I think I took that out of the letter, but we were trying to show a stat on how restaurant usage is picking up, which indicates positive trends but most importantly, the card is still early in its lifecycle. We’ve had many conversations about it, but it takes a long time to invent a new type of card. It’s not merely credit or debit—there are many nuances involved. The card is presently performing well, and we have a lot of room to grow while adding more features.

Okay. Thank you.

Thank you. Our next question comes from the line of Ramsey El-Assal with Barclays. Please proceed with your question.

Hi. Thanks for taking my question this morning. As you look to roll out into more international markets, is your current funding model agnostic when it comes to operating outside the US? Do you have to find geographic-specific partners? And then what about credit performance as you roll out these markets? Is there a period where models will need to season in new geographies? Or is a lot of the intelligence in your US model transferable as you move into different geographies?

We'll take it in reverse order. Yes, we absolutely expect to be in a learning period, where we will put out some loan volume and see how it pays back. Our next announced market is the UK. Credit behaviors and performance there have similarities with the US. It’s a Western democracy utilizing credit reporting. The same credit bureaus work there, and similar data types apply. Our success in Canada suggests our models transport well across borders. The UK will be another good test. We will be careful—not roll out a trillion dollars of volume and wait to see what happens. It will be gradual. Beyond that, we’ve said nothing on future locations, but we will have to be careful with credit.

As for funding, yes, it will require localizing. We want to do that to ensure currency matching with local markets, but getting through all the different funding sources and credit postures will require localization. There are global synergies as the institutions we work with have a global footprint, which will help, but we will need localized funding sources.

Great. Merchant additions went up nicely. They've gone up nicely in prior quarters. A quick follow-up for me. New merchant additions went up nicely this quarter; they've gone up nicely in prior quarters. Can you give us any further commentary on where you're seeing success? Is it particular verticals, digital versus in-store? What is the driver? Or is it just a general rising tide type of situation with new merchant additions?

It's more of a rising tide. I've stopped calling out particular brands because I felt like I was letting people down when I didn’t mention a cool name brand. We continue to search for great logos and add them quite frequently. My excitement lies in the mid-sized businesses with $10 million to $50 million in GMV; they are fantastic to work with since they are growth-focused. When merchants grow, we grow faster. We've observed that, regardless of economic times or interest rates, when merchants are positioned to grow their GMV and sign up for Affirm, our growth within that merchant consistently exceeds theirs. We’re pursuing both direct and channel-based sales to those merchants. I spend much of my time talking to these CEOs to understand what they need and how we can assist their advertising and growth budgets. This understanding is crucial for us.

I want to reemphasize something Max said that's really important: in addition to our direct sales, we're also partnering now more with people who can help distribute our product for us. This has been a really successful strategy and is gaining distribution in some pockets that are harder to penetrate with our small sales force.

Great. Thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Zane Keller for closing comments.

Thank you, everybody, for joining the call today. We look forward to speaking with you again next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.