Affirm Holdings, Inc. Q1 FY2025 Earnings Call

Good day, ladies and gentlemen, and thank you for joining us for this Affirm Fiscal Holdings First Quarter 2025. Getting started, all participants are in a listen-only mode, but later you will have the opportunity to ask questions during the question-and-answer session. Please note this session is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the floor over to Mr. Zane Keller. Please go ahead, sir.

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; Michael Linford, Affirm's Chief Operating Officer; and Rob O'Hare, 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. It was another great quarter, as you all can see. I will stick to the tradition of having fewer comments so long as the results are good. We're firing on all cylinders. We're getting ready for a really good holiday season. Everything looks very nice, spreading the engines to fly across the Atlantic, et cetera, et cetera. Back to you, Zane.

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

We'll take our first question today from Andrew Bauch at Wells Fargo. Please go ahead.

Hey, guys. Nice set of results here, and thanks for the question. Just could you unpack the uplift to revenue as a percentage of GMV for the full year and then RLTC coming up nice from 10 to 20 basis points and what are the drivers of that?

Yes, thank you for the question. The business is demonstrating very strong unit economics. We're increasing our earnings through both interest income from pricing initiatives, which has largely materialized. We are also experiencing advantages in the capital markets that are influencing aspects such as gain on sale. Additionally, we anticipate further growth from merchant fees, particularly with enhancements like Visa Flexible Credentials. All of these factors contribute positively to our bottom line. So, I see revenue improvements translating into better margins as well.

Yes, I understand. I thought I would assume that you guys were planning on reinvesting some of the excess RLTC back in for growth. So, maybe if you just kind of expand upon the thought there?

We still want to do that. I think we're still in a position where we've got a healthy amount of margin that we can invest in and we will do that. We'll do that in the form of foregone revenue, you know, 0% APR incentive offers. We'll also do that in the form of operating expense investments we want to make down the P&L. But overall, there's still a healthy amount of benefit flowing through.

Great. Thank you, Michael.

Next, we'll hear from Jason Kupferberg at Bank of America.

Hi. This is actually Nate on for Jason. But nice to start results here. I think, Max, you previously talked about RLTC margins above 4% means you're not approving enough people, you know, below 3%. It's not enough. I mean it's not great enough leverage. Just like looking at 2Q here like the guide implies a margin about 3.8% on RLTC and 2Q is typically a low point in terms of margins. So just curious like can I get some more color on like your current underwriting posture and like where you expect RLTC margin specifically to trend?

Great question. Thank you. Our posture is largely unchanged. We obviously monitor the results all the time. And on any given week, we are tuning settings in that way, but there's not been a major movement upwards or downward from the approval standpoint. You're exactly right. We were able to enjoy some very healthy consumer growth in the numbers in Q1 because we found ourselves with capital to put forward towards some incremental approvals. We'll continue tuning that as we go forward. And you're right, Q2 is typically low points. We feel good about what we're seeing in front of us right now. But again we always dance from the point-of-view of having really strong credit results, and everything else kind of falls out of that. We won't compromise on that. Everything else is driven by goals versus numbers. Michael?

Thank you.

And look, I think we actually are pretty optimistic on the margin in the back half of the year as well. I don't want to skip that point. The results in Q2 are going to be strong, the 3.8% as you suggested. We're going to have good unit economics this quarter, we believe. But we're also going to have strong performance in the back half of the year as well. I just want to double-click a little bit on the capital side. I do think there is really constructive capital markets out there for us right now, and that does cause certain quarters, including Q2, to maybe outperform what we would consider to be more of a run-rate quarter for Q2. But again, for the full year, this is where we want the business to be, in the higher end of the 3% to 4% range.

Thank you, sir. Our next question today will come from the line of John Hecht at Jefferies.

Good afternoon, guys. Congratulations on another good quarter. I guess one of the trends we're seeing out there now is a pretty big pickup in secondary market activity. I think that's tied to kind of interest rate movements and credit trends and so forth. How does that impact your thinking about kind of what balance sheet management, retention versus sale and so forth, given those trends?

Yes. So, the market forward flow whole loan purchasers is really, really strong right now. The credit performance that we've delivered over the past year and a half combined with the real understanding of the value of the short-duration asset and the disciplined managers that we have at Affirm have put us in a really strong position and where we think at or near the top of the pack of producers of these assets. Alongside that, the dynamics on the supply side of that capital with trends like the private credit trend have created an environment that's very, very good for us. And so we will continue to benefit from that. But like whenever we have one funding channel that is in high demand or we can maybe benefit from in the near-term, we're still very careful to ensure that we create a stable funding base across all of our channels. You've seen our ABS execution also be very consistent and that has served us very well. In fact, our ABS execution helps our forward flow execution. The two work together. I would not read the very constructive forward flow market as a suggestion that we don't want to continue to grow our ABS business as well, which, of course, for our revolving deals are still consolidated onto the balance sheet. What I do think is true is that the warehouse funding channel for us is a channel that we can continue to maintain but not grow as a percentage of total platform portfolio given the robust forward flow and ABS market reception.

Perfect. Thanks.

James Faucette with Morgan Stanley. Please go ahead with your question.

Great. Thank you very much. I wanted to just quickly touch base on kind of the outlook for 0% promotions as we go into the holiday season. Typically, this would be where we'd see some strength. I'm wondering kind of tying that back to the RLTC commentary, a lot of times because of the MDR differences that can provide some RLTC benefit as well. So, just help us think through that potential as a driver and promotion for the holiday season? Thanks.

Certainly. We are familiar with utilizing zero-percent promotions, and we are experiencing strong enthusiasm from merchants as we approach the holiday season. I don't want to provide specific numerical guidelines, but I feel very optimistic about the demand we are seeing. Additionally, we have been successful in enticing new consumers to try our offerings, which is an important strategy for us. Merchants are eager to promote their gimmick-free, late fee-free promotions with no interest, and we plan to support our top merchant partners' advertising efforts, which always helps our cause. There are positive developments ahead, and as I mentioned in my letter, we are in the process of aligning our financial programs, which includes various promotions like fixed APRs, reduced APRs, and 3% APRs. You will notice consistency across different channels, including cards and digital wallets, which is exciting because some of these have higher transaction frequencies, with cards being a significant factor. With all these elements working together, we anticipate an increase in volume.

And I'll maybe add, I think the strong unit economics in the business right now combined with a pretty favorable outlook that we have on the next quarters to come puts us in a position where we get to be pretty aggressive. I do think we were constrained over the past couple of years where we had a little bit of catch-up to do. We're very front-footed right now in our ability to meet those merchants where they are, to price very competitively, and to be very aggressive. And that's a really good position to be in. We're obviously very mindful about the economics of these promotions, and so we're careful about them. But we're in a very different spot than we were a couple of years ago where we actually feel like we can be pretty aggressive here right now.

Great. Thanks.

Vincent Caintic at BTIG. Please go ahead with your question.

Hi. Good afternoon. Thanks for taking my question. Wanted to go back to the discussion about margins. So it was nice to see the guidance for the adjusted operating income margin now above 20% and then the guidance for the fiscal second quarter of the 21% to 23%. So I wonder if you could maybe discuss sort of what are you expecting in terms of longer-term operating income margins, where you think you can operate? It seems like the 21% to 23% is sort of in that mid to high 3% RLTC, where do you think that can get and the run rate going forward? Thank you.

So we're not updating our long-term outlook and certainly not going to touch the 3% to 4% framework that we've had out there forever. So just know that those are still as they were. But it is obvious that we're running above the margin framework that we put out just about a year ago at the Investor Forum and that's not lost on us. We think part of that's because the pace at which we were able to drive operating leverage in the business exceeded our own expectations. And part of that's because we now have our eyes set on achieving the next financial milestone, which is profitability down the P&L. We still feel like we're in a really good position to do that. And I think once we do, we'll be in a position to update where we would expect the business to be longer-term. But I would also reiterate a statement that we made last summer, and I think we can repeat it on the Q1 call. We expect to continue to grow margins from here. We think there's still more operating leverage in this business and believe that we can continue to grow margins from here.

Okay, great. Very helpful. Thank you.

Our next question will come from Dan Dolev at Mizuho. Please go ahead, sir.

Hey, guys. Thanks for taking my question. Great results as always. Max, we noticed that active consumer growth accelerated again. Can you maybe touch a little bit on the factors behind the acceleration? Thank you.

Hi, Dan. Thank you for the question. Consumers love Affirm; just more coming our way. The probably the most important lever, jokes aside, is we have the margin. Obviously, you saw the outsized print last quarter. This quarter is no slouch either. We feel great about the bottom-line economics, and we're able to reinvest them in deeper approvals, more compelling new consumer deals. We're also just getting smarter about reengaging consumers that had one transaction a year, two transactions, three times a year or you just saw we clipped five transactions a year, which is a new front digit for us on that one. So just many different efforts. We focused very deliberately on active users this quarter, and sorry I keep repeating this, but every time Affirm team decides to do something, it is rarely overnight, but it is never not successful. We have a very good track record of delivering on a goal we set in front of us. We're never the zero to 60 in half a second, but once we get going, there's no stopping us. So this quarter's explicit goal was we want more new users, we want more active users, we want higher frequency, and all of that has happened and we're not stopping. We'll have a lot more of that in store.

Cool. Amazing. Thanks, Max.

Rob Wildhack at Autonomous Research. Please go ahead with your question.

Hi, guys. Maybe just to start, I wanted to get your certainly early thoughts on the UK launch. I mean how have the conversations there gone with merchants? I'm curious why you think or what you think is your right to win in that already pretty competitive market.

Yes, it was quite an experience. We've been pre-selling in the UK for some time now. Initially, we approached the market quietly and have since become more vocal with merchants, including those we've worked with in the US and Canada. We've also established a sales team in the UK, led by Ruth, who has been pivotal in driving our sales efforts. The initial response has been very positive. Merchants highlight two main reasons they are eager for us to become more active in the UK market. First, there is a demand for longer-term monthly payment products, as the current offerings are not adequately meeting needs for financing options like six or twelve-month plans. The existing competitors are mainly banks, which are not particularly favored. We believe there's significant interest in our fee-free, non-compounding interest products. Second, we are clear about our business model and focused on simplifying the purchasing process for consumers, which resonates positively with merchants. Even in a well-developed market, there is a need for straightforward solutions that drive sales. My recent discussions with our launch partner, Alternative Airlines, have shown promising results with a growing number of transactions that meet the need for longer-term payment plans. Overall, we are very excited about the UK market. I am particularly enthusiastic and looking forward to spending more time in London.

Okay. And a reminder.

And then bigger picture, Max. And relatedly, I wanted to ask about the competitive landscape more broadly. I appreciate your thoughts on the UK. At the same time, you have players from overseas who are showing up on Apple Pay and maybe drifting into some longer duration products. I mean, it seems like the competitive boundaries of the last couple of years might be shrinking. Would you agree with that characterization? And then how would you think about sustaining growth and expansion without igniting some kind of competitive race to the bottom?

You know, I will needlessly remind you that in an extremely competitive US market, we are over a third of the volume and more than half the revenue. There's a reason for that. What we do is really, really hard, and it also turns out to be really, really valuable. These longer terms aren't just a, you know, what we should give people more time to pay; it would be great to do it without late fees. It's a huge competitive moat. Underwriting is a very difficult thing to do. You have to have massive infrastructure to mine the data that you get. It's not enough to have and store the data; you actually have to know what to do with it. You have a huge machine learning team. You have to have a compliance team to make sure the machine learning team uses the data in the ways that are permissible versus not, and so on and so forth. Our moat has been our willingness to do the hard, difficult thing without compromise, and we're bringing that to other markets. The battle has been brought to us in the US, so we've held off the onslaught better than I think anybody expected and continue to do so. We're bringing the battle to them in Europe and in the UK, not the other way around. I can't wait to ride my bike or at least watch some quality Tour de France racing there. Sorry, the bike memes are a little thing. I'll stop.

We'll hear from Reggie Smith at JPMorgan.

Hey, guys. Congrats on the quarter. I had two questions. One is super quick. I wanted to make sure, I guess, you issue a process that talked about increased scrutiny on sponsored banks. I wanted to make sure that that would not impact the growth of the Affirm card? That should be a quick answer. But then, I think bigger picture, I'm curious if there are any nuances in terms of underwriting consumers in the UK versus the US and how you guys go about kind of building out your underwriting knowledge there as you kind of enter that new market?

Great. The short answer to your question is, no, it will not. We're very excited about rolling out the card and are accelerating it, of all things. I think regulatory scrutiny increasing is a thing you experience if you're small and unknown to the regulators. We've been big and getting much bigger quarter-after-quarter. We're very familiar with all of our regulators. We engage with them regularly. We've invested in compliance appropriately, and the regulatory scrutiny on us is what it is and they will continue doing. Frankly, we're proud to have the engagement that we have. That part, we're going to be just fine. We're not dependent on any one provider incidentally. So, we're quite careful to ensure that no matter what sort of ups and downs regulatory or otherwise appear on the horizon for our providers, we have ways to make sure that we're unaffected. On the UK underwriting, it's going to be great. We have the infrastructure, we have the people, we have the knowledge, and we have a decade of building an underwriting engine from nothing to something very, very powerful. We're coming in very prepared, with a lot of experience. Our machine learning team, I think the tenure of the folks in it is the longest at Affirm. The guy who runs our underwriting and machine learning test has been with the company almost as long as I have, and he has seen the build-out of the baby little Affirm ITACs 1.0 and is now sitting on POS v12 launch, if I remember correctly. He's just had an enormous amount of experience, and the folks around him are trained by him, and it's a brilliant team. The UK is a little bit different. It's not enormously different. We've spent a lot of time consulting with the local equivalents of the credit reporting agencies. We know a lot of people who have lent money in the market to get the knowledge primed, but ultimately, we will build the engine the same way we did it in the US by scaling our loan book, looking at the results, and fine-tuning and gathering proprietary data that we can continue squeezing incremental value into the curve from.

Thank you. Is there anything you can talk about in terms of the nuance in that market that anecdotally like consumers are different from American consumers in any way, payback spending, anything you can share?

Empirically not yet. It's been like, I don't know, eight days of transactional data live or something along those lines. The first payment defaults haven't hit yet. So we'll speak to that probably towards next quarter. But, I mean, as always, we measure seven times, cut once. So we'll be deliberate. We'll be very careful. We very cautiously rolled out our merchant rollout timeline; is not or timeline/pipeline is not accidental. We know exactly what we'll do next. So far, so good. Obviously, we have a lot of early signals that we monitor, most importantly, in fraud and abuse. We feel good about that. Again, it's exactly the sort of thing that prognosticating now is pointless, but in 34 days from the first loan, we'll tell you exactly how the very first cohort is doing and we'll certainly be watching it like hawks and continue tracking all these metrics.

Of course you will. Perfect. Thank you.

And Jill Shea with UBS. Please go ahead. Your line is open.

Sorry about that. Thanks for taking the question. You've noted in the shareholder letter that, as it relates to funding, declining benchmark rates will be a tailwind to RLTC. Can you just touch on your view on the path of funding costs in light of the current interest rate outlook? And maybe help us think about the magnitude and pacing of the benefit as we move through the year?

Yes. So the way to think about rate impacts on our business on the way down was really the same way on the way up. The kind of full benefit or full impact on the P&L is about 40 basis points for every 100 basis points of rate movement. But that takes about a year to a year and a half to play through. You know we were really experiencing still the rising rate, the impact of rising rates through the first part of this calendar year, even though rates had stopped moving well before that. So we would expect the declining rates to be tailwinds, but to be tailwinds marginally and take all the time to flow through the P&L. A good rule of thumb is 40 basis points of benefit in terms of cost for every 100 basis points of rate movement. That being said, we do think because we're able to operate at the higher end of our margin structure right now, we would not anticipate flowing that through to margin. We would anticipate that to be part of what we're able to reinvest back in really compelling consumer and merchant offers.

Very helpful. Thank you.

And that was our final question from our audience. Gentlemen, I'll turn it back to you for any additional or closing remarks that you have.

Thank you all for joining today. We appreciate your time and look forward to speaking with you again next quarter.

This does conclude today's teleconference, and we thank you all for your participation. You may now disconnect your lines.