Earnings Call Transcript
Affirm Holdings, Inc. (AFRM)
Earnings Call Transcript - AFRM Q2 2022
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Affirm Holdings Fiscal Year 2022 Second Quarter Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. Following the speakers’ remarks, we will open the line for your questions. As a reminder, this conference call is being recorded and a replay of the call will be available on your Investor Relations website for a reasonable period of time after the call. I'd now like to turn the call over to Ron Clark, Vice President of Investor Relations. Thank you. You may begin.
Ron Clark, Vice President of Investor Relations
Thanks, operator. Before we begin, I'd 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 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, but not as a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release, which is available on our Investor Relations website. Hosting today's call are Max Levchin, Affirm's Founder and Chief Executive Officer; and Michael Linford, Affirm's Chief Financial Officer. With that, I'd like to turn over the call to Max to begin.
Max Levchin, CEO
Hello, and thank you for joining us on this earnings call. Affirm is just a handful of days away from its tenth anniversary and this earnings report also marks the first anniversary of our public debut. While the road ahead of us is significantly longer than the one we've traveled so far, the occasion does warrant a moment of reflection on the execution of our strategy during the last 12 months. We feel great about our progress. We remain quite unpivoted and focused on delivering long-term compounding value to all our stakeholders, consumers, merchants, employees and shareholders. As we introduced ourselves to the public markets a year ago we talked about several key themes. First and foremost is our mission, which is to deliver honest financial products to improve lives and to do so while delighting the people we get to serve every day. Because the opportunity embedded in our mission is still so vast and open consumer growth is very important to Affirm. We've done very well. Indeed our active consumer growth accelerated growing by 150% to provide well north of 11 million people with a smarter way to pay. Growth for us is never just about getting the next million consumers. It's also about the impact we can have on the financial well-being of the folks who rely on Affirm. I’ve also talked about our other all important constituent, the merchant. Affirm is as much a safe and transparent pay-over-time option for the buyer, as it is the ultimate marketing tool for the seller. We help our partners drive meaningful incremental sales without needing to resort to gimmicks or discounting. The number of active merchants on our platform is another key measure for Affirm and over the last year, we've significantly expanded our reach. There too, we accelerated with a more than 20x increase from a year ago and a 64% increase from the rolling 12-month tally we reported just 90 days ago. As a company founded by engineers, we focused early on investing heavily in technology, scalable enough to economically support the smallest of businesses all the way up to the world's largest retailers. We've continued this policy of investment and development in pursuit of technological competitive superiority. The strategy is working and delivering results. In fact, our technology is what has enabled us to work with tech-savvy giants, such as Walmart, Shopify, Amazon and Target. We estimate that this year, Affirm processed 1.6% of all US online transaction volume for the Black Friday, Cyber Monday period, another triple-digit increase from last year. Simultaneously, a momentous number and a signifier of just how early we are in this market. Even a decade in the ramp-up to the holiday shopping rush is an intense yet exhilarating exercise in scalability preparedness. Each year's Black Friday weekend brings by far the greatest number of concurrent transactions we've ever experienced. I'm very proud of our engineering teams for delivering another flawlessly executed record-breaking Black Friday weekend, and I'm also grateful to our friends at Shopify engineering, who had lent some of their technical expertise to us as we prepped in the days before. It is an oft-repeated outage that product innovation slows down, as companies go public. I'm pleased to report that we were able to accelerate our product delivery since the IPO. We've rolled out cash back rewards for participating merchants, delivered the unique adaptive checkout, launched the Affirm SuperApp and the Affirm Chrome extension and introduced the beta version of super simple consumer-friendly crypto savings. You may have noted the announcement of Visa being the launch partner for Debit+ which is now in the initial waitlist rollout. Though I will continue to caution you to not yet forecast this product's impact on our P&L at scale, I do have fun insight to share. On average, the number of weekly transactions by Debit+ consumers, excluding our own employees, is greater than an order of magnitude above that of a regular Affirm user. Of course, these are enthusiastic early adopters and we fully expect the number to normalize, but it's exciting to see first glimpses of what Affirm as a daily instrument might look like. We remain very excited about the future of this product, and expect to talk a lot more about it this year. We had said last year that BNPL is an international phenomenon and we intend to bring Affirm's unique no late fees, no grudges, no regress approach well beyond our home borders. Over the last 12 months, we've solidified our industry leadership with PayBright by Affirm in Canada and launched in Australia our first non-North American market, and the growth of our business continues to accelerate. Affirm had more than 16,000 active merchants on the platform as of the end of calendar 2021, largely thanks to our partnerships with online commerce platforms. In aggregate, Affirm is now present on sites that account for more than half of all US e-commerce and that number continues to march higher every day. In our second quarter, year-over-year GMV growth accelerated to 115% from 84% in the first fiscal quarter. Moving beyond the testing phase of our collaboration with Amazon before the holidays was a significant driver of this growth. However, if you exclude Amazon, our GMV still doubled year-over-year. We are highly cognizant of the fact that over 80% of commerce is still conducted offline. Our recently announced partnerships with Verifone and Adient are just two of the numerous investments we're making with our partners to bring honest financial products to consumers at the physical point-of-sale. We're also expanding the ability to use Affirm in-store with our own products like Debit+. Our focus on using exceptional technology to drive growth and improve efficiency has been a winning strategy for Affirm, and we never stopped finding ways to optimize and deliver even more value. This shows up in our results in a number of ways from new partnerships to long-standing relationships. For example, iterating over the last three years, our relationship with Walmart has grown, as we prove the value of our products. We expect similarly great things from our other major partnerships with time. As we develop with and learn from each customer, we are excited to bring these learnings and the products they engender to all merchants big and small. The strength of our network is measured in merchant coverage and repeat consumer engagement both of which are rising rapidly. We grew total transactions by 218% and transactions per active user by 15% year-over-year even as we added a tremendous number of new consumers. Our momentum is strengthening. Our strategy is working and we are extending our lead. We intend to double down on the three key things that got us here: One, deliver unique and delightful financial products that align fully with our mission; Two continue to be the partner of choice for merchants that care about intelligent growth scalability and reliability; and three deepen our underwriting advantage. Speaking of underwriting. We manage risk, though we are an easy-to-understand tool to maximize one's personal capital and the retail marketers' best friend. At our core Affirm is ultimately a risk managing business. We facilitate transactions, settle with the merchant soon thereafter and bill the buyer over a predetermined period of time. But wait there's more. When we charge interest, which we don't always do, we don't compound it into principal. Moreover, we don't compound interest after it reaches the amount we communicated to the consumer at purchase time. We refine interest when the buyer prepays. We don't even charge late fees. These are all deliberate choices made in the first few days of our company's life. We aimed to align ourselves with our consumers in this manner avoiding the moral hazard of capitalizing on their mistakes for revenue opportunities. These decisions are as on mission and moral as they are self-serving. These policies are an important part of why our consumer satisfaction is so high and we only wanted to go up. With the self-imposed guardrails, exceptional underwriting and risk management frameworks are a requirement. That's why we underwrite every transaction before making a credit decision unlike some of our competitors in the BNPL space who readily admit they do no underwriting at all. It is also important to understand that unlike many players in our industry we do not treat delinquencies or defaults as an outcome of our business decisions. Indeed, we choose acceptable delinquency rates as an input into our decision-making, based on the pricing our products command with our customers, our view of the macroeconomic conditions and the demand for our loan volume in the capital markets. This distinction may seem subtle, but I think it really helps understand our approach to risk. We spent the last decade building what we believe to be one of the best-in-class credit underwriting ecosystems. Data, tools, processes, and teams that deliver underwriting models with some of the very best results in the industry. Today I'll pull the curtain back a little and while I will keep it very high-level in part to avoid giving out trade secrets feel free to tune out for a few minutes while I nerd out. Affirm's underwriting advantage begins before any of our models are interrogated for a decision with our product design. Because Affirm is predominantly offered at the point of sale, we have a natural opportunity to explain our value and transparent approach to the consumer. As a result, we avoid much of the adverse selection that often comes with traditional lending. Coupled with the SKU level data we receive from our partners our models tend to split the risk far better than those used in traditional consumer loans. Another fundamental structural advantage Affirm has, is its total separability of transactions. Unlike providers of lines of credit, we underwrite transactions individually modeling a consumer's ability to pay us back, as well as their propensity to do so. This notion of separability is also recursive a consequence of our product because repayment schedules are highly predictable our models operate at an individual installment level. This separability is a powerful tool for modeling as well as managing risk. We're able to deliver a reliable forward-looking picture of both consumers and our own cash flow. Our proprietary network of directly integrated merchants as well as other sources of non-traditional underwriting data offers us a significant raw data advantage into feature engineering. We maintain a library of over 500 features that we select from as we create new models or update existing ones, while continuously looking for and eliminating any potential for disparate impact in our decisioning both at an individual variable and model level. We train our models using academically well-understood and boosting techniques with significant proprietary modifications we've invented that help us improve results. Because from the very beginning, we focused equally on consumer and merchant information, we ended up with a large number of models that are specific to our products and merchants who use them. Moreover, as we launch new products with new and existing partners, we acquire new types of data that we incorporate into the models and over time give incremental weight too. Underwriting models decay over time, as macroeconomic conditions and consumer behaviors change. Even the very best performing ones can lose a few percentage points of their area under the curve every few months. Over the years, we've built special-purpose models that track model decay, the machine learning equivalent of a canary in the coal mine. Our proprietary software and processes allow us to rapidly retrain, retest and redeploy models where the performance has deteriorated in a matter of days. To illustrate this, let's take a side-by-side look at ITACS, one of our longest-serving proprietary models versus a traditional credit scoring system like FICO. Using ITACS reducing originations by 10% would eliminate one-third of all delinquencies in dollars, while using the traditional credit scoring system would only reduce delinquencies by a mere 13%. Let's take it a step further. If we were to reduce originations by 30% using ITACS, we would remove 70% of all delinquencies, while the traditional score would only catch 36%. So needless to say, this model slopes a lot better than the traditional industry standard. These achievements may sound quite abstract, but they have a very real impact with our superior underwriting capabilities. Affirm can approve many more college students buying tickets to see family after months of pandemic isolation and young parents picking up their first stroller. And because Affirm's average loan duration at origination by design is very short, at just 5.2 months, the exceptional precision and recall of our credit models give us great confidence that our portfolio both retained and sold will continue to perform well in the future. Any use of advanced technology has both advantages and risks associated with it. As we push our model performance further in pursuit of expanding our offerings, we work just as diligently on ensuring that our models are both compliant with all applicable laws and rules and that our model decisions are both reasonable and are understandable by consumers. We regularly audit our models to avoid correlation with prohibited basis and have them audited externally. We also invest heavily in explainability of model outcomes, so that both consumers and regulators can understand our decisions quite easily. None of this of course would exist without the extraordinary team of people that make it all possible. I am truly fortunate to have been able to start this company with a group of brilliant minds, who in turn attracted more and more talented folks to join our mission and bring their mathematical and other talents to bear. It is this embarrassment of riches among my teammates that makes me so optimistic about the next decade of Affirm. Large as some of these numbers might be, Affirm still accounts for around 1% of US e-commerce and both consumers and merchants are genuinely excited to get more value from Affirm. And we are excited to deliver it. As usual I want to thank my team for all their amazing work. And even during some pretty volatile moments for our stock price for staying truly focused on the long-term value creation for all our stakeholders and on our mission. Now on to Michael for the numbers.
Michael Linford, CFO
Thanks, Max and good afternoon, everyone. Our second quarter results demonstrated a massive step change in our network scale driven by our partnership with the largest enterprises and our technology advantage. Growth accelerated on both sides of our network as active consumers more than doubled, while active merchants increased more than 20 times. Frequency increased alongside that explosive user growth. Total transactions grew 218%, the fastest rate since our Series D private funding round. We grew GMV 115% in revenue by 77%. In November, we completed the rollout of our initial offering at Amazon in the United States. And even excluding Amazon's contribution we significantly exceeded our outlook for both GMV and revenue. Unit economics were also strong. Revenue less transaction costs grew faster than revenue at 93% from the prior year. And even as we accelerated network growth, we continue to operate with efficiency reducing the equity capital we used to fund our loans by 17% versus last year. With the accelerating growth of our business and the early traction with our enterprise partners, we are raising our outlook for fiscal year 2022, which I'll share more about in a moment. Before I do that let's walk through the second quarter results. Unless stated otherwise, all comparisons refer to our second fiscal quarter of 2022 versus Q2 of fiscal 2021. We had another great quarter for consumer growth. Active consumers increased 150% to 11.2 million and increased 2.5 million sequentially from fiscal Q1. Despite adding users at this aggressive pace, we grew transactions per active consumer by 15% year-to-year and more than tripled the number of transactions. More merchants, platforms, and brands are leveraging the power of Affirm to grow their businesses. In the second quarter active merchants grew to more than 168,000 from just 8,000 last year, thanks in large part to the scaling of our partnership with Shopify. On a sequential basis, active merchants, which we calculate over a trailing 12-month timeframe, grew 64% from the September ending quarter. Turning to GMV. We grew GMV to $4.5 billion in our second quarter, a $2.4 billion increase from last year. The 115% increase includes the volume from our partnership with Amazon. We completed the launch of our interest-bearing program at Amazon in November ahead of Black Friday. And while the program is still in its infancy with a long roadmap of optimizations to work on, we've seen rapid consumer adoption. We look forward to years of growth in this collaboration. We have strong momentum across our business. Excluding Amazon, GMV doubled with growth across all products and verticals. I would also note that our business with Peloton, our second largest merchant partner by GMV in the quarter, was up against an unusually strong prior year comp following the launch of a new product slate and boosted by COVID tailwinds. As a testament to the increasing depth and breadth of our network, no single merchant accounted for more than 10% of Q2 GMV. One year ago we discussed how we would expand into higher frequency purchase areas and diversify our merchant partnerships. A year later I'm really proud of how our team has delivered on these objectives for our shareholders. We had a phenomenal holiday season. We more than doubled our volume from Black Friday Cyber Monday, and we believe we took significant market share from both traditional incumbents and BNPL pure plays. As Max shared, we estimate that Affirm facilitated 1.6% of total online transaction volume for the Black Friday, Cyber Monday period in the US, and we saw particular strength in key holiday categories in Q2. Travel and ticketing increased, up 314% from last year, topping last quarter's high mark even despite the emergence of the Omicron variant. General merchandise grew 368% above last year, driven by our deepening partnership with the industry's leading retailers and the launch of our offering at Amazon in the US. Consumer electronics, which grew 209% year-to-year was another great story driven by strong demand for TVs, laptops, and gaming consoles. Our results this holiday season highlighted our ability to take share and grow in any environment. And importantly, why we're so different from the competition. Outside the US, we had another outstanding quarter. Our Canadian business more than tripled in size, thanks to existing and new partnerships, including Apple, which launched in the fall to brisk consumer demand. In the second quarter, we also entered the Australian market with Peloton, and look forward to growing our business with them there. This quarter, our interest-bearing program which includes our initial offering at Amazon grew significantly up 124% year-on-year to $1.4 billion. Before I jump into the financials, let me walk through the mechanics of this offering to illustrate the impact on the income statement. On the revenue side, we monetize these loans by either holding them to maturity or selling them to third parties. When we hold the loans, we primarily earn interest income, which we recognize over the duration of the loan. Hence, this quarter's revenue reflects just a portion of the total yield we will ultimately see from the GMV we generated in Q2. We will recognize the balance over the subsequent quarters. As an illustrative data point, we sold 59% of the interest-bearing loans generated in the US this quarter and retained the remainder. On the expense side, we provision for credit losses upfront for loans we hold this means that the margin profile is back-end weighted. Our partnerships with key enterprise merchants are unlocking more opportunities for our business every day and we are investing today to realize the full long-term potential. While we are just in the beginning stages in scaling these partnerships, we are already seeing them drive network expansion and we expect to deliver strong unit economics when they reach scale. Now turning to the financials, the strong GMV growth also drove strong revenue growth. Net revenue grew 77% to $361 million, well above our outlook. Total network revenue grew 39%, while interest income increased 87% and gain on loan sale rose four-fold. Revenue as a percentage of GMV contracted 170 basis points to 8% driven by product mix. Split Pay grew over four times year-on-year and accounted for more than 20% of GMV in the second quarter from just 11% last year. In our earnings supplement posted to our Investor Relations website, you will see that merchant revenue take rates have remained relatively constant for each of our offerings. On the expense side, we continue to grow revenue faster than transaction costs delivering real leverage. Total transaction costs of $177 million grew 63% year-over-year compared to revenue growth of 77%. And excluding provision for credit losses, transaction cost as a percentage of GMV declined 190 basis points to 2.8%. Given the mix shift from longer duration 0% APR loans, loss on loan purchase commitments declined 4%, while improvements in our capital programs helped limit the growth of funding costs to 47%. Provision for credit losses grew from $13 million when a year ago to $53 million as the year ago figure included a $39 million release of excess COVID-related loan allowance, while this year's figure reflects the intentional normalization of credit that we've discussed over the past several quarters. Over the first half of the fiscal year, we have managed delinquencies of 30 days or more to remain below the same periods of fiscal 2019 and 2020, even as we have expanded the credit box to a more normalized level compared to the early days of the pandemic. Our strong top-line growth and leverage we achieved on transaction costs drove a 93% increase in revenue less transaction costs to $184 million, above our outlook range or 4.1% of GMV. Looking at OpEx beyond transaction costs. We continue to invest in building our team and elevating our brand. We doubled headcount to more than 2000 Affirm employees and increased marketing around the holidays. Our teams have delivered a torrent of exciting new offerings. While our brand campaign drove greater awareness across all age cohorts and helped us reach the highest aided awareness among BNPL providers at 45%. Growing our team resulted in higher personnel costs and stock-based compensation. In Q2, total operating expenses, exclusive of transaction costs, grew $258 million, of which $158 million was related to D&A, stock-based compensation, foreign expense and one-time expenses related to our IPO and acquisitions. Excluding these items, non-transactional operating expenses grew 109%. On a GAAP basis, operating loss was $196 million, which compares to a loss of $27 million last year. Adjusted operating loss was $8 million in the quarter compared to a $3 million income in the prior year. Now turning to our balance sheet. We fortified our cash position and delivered accelerating GMV growth while continuing to manage our capital with discipline and efficiency. In November, we issued $1.7 billion in zero coupon senior convertible notes with a five-year maturity, which has significantly increased the capital we have to invest in growth, at an extremely attractive long-term borrowing cost while minimizing dilution. Our effective capital markets program and disciplined approach helped to reduce equity capital used to fund our business from $277 million last year to $230 million even as loans on the balance sheet grew by more than $500 million. As a percentage of total platform portfolio, equity capital required declined to 3.6% from 7.5% last year. Total platform portfolio grew 72% from $3.7 billion to $6.3 billion at the end and we increased our overall funding capacity in line from $4.7 billion last year to $8.8 billion. Over the past year, we brought on $1.9 billion in new loan buyer commitments from both new and existing capital partners. Our balance is held by third-party loan buyers from our forward flow program grew 129% to $3.7 billion while our securitization program grew 83%. Our health balances declined 24% as we continue to focus on more efficient funding vehicles. Before I move to our outlook, I want to touch on an important topic that has been top of mind for investors—interest rates. While potential interest rate hikes have dominated headlines, we remain confident in our ability to continue to grow rapidly while delivering strong economics as rates rise. Our financial outlook already reflects a roughly 180 basis point increase embedded in the three-month LIBOR forward curve and our current long-term model which caused a revenue less transaction cost of 3% to 4% also assumes rate normalization. We have significant advantages to help us mitigate the impact of rising rates, including broad and diverse funding partnerships that allow us to shift funding to less rate-sensitive counterparties, sophisticated underwriting and risk management infrastructure that allows us to manage unit economics with changes to our cost environment, and high turnover short-term assets that make our portfolio inherently nimble and able to react quickly to changing market conditions. At a constant product and funding mix, we estimate that a 100 basis point increase beyond the increase implied by the current yield curve would only result in a 10 to 20 basis point impact to revenue less transaction cost as a percentage of GMV for the remainder of fiscal year 2022. Looking out to fiscal 2023, we believe that a further 100 basis point rate increase, again beyond current expectations would only result in approximately a 20 basis point impact to revenue less transaction cost as a percentage of GMV based upon our current funding and GMV mix. And that is before we apply any of the numerous offsets we have including consumer and merchant pricing, funding strategies and credit optimizations. Now turning to the outlook. Our business has never been stronger. And as we look through the remainder of our fiscal year, we are raising our financial outlook to reflect the robust second quarter results, accelerating momentum in the business and we are now including Amazon's expected contribution to the outlook. For fiscal year 2022, we now expect GMV to be between $14.58 billion and $14.78 billion, representing a 76% to 78% increase from fiscal year 2021. Given the strong traction we're seeing with Shopify, we now expect our Split Pay offering to comprise 15% to 20% of total GMV for the fiscal year. We expect revenue of $1.29 billion to $1.31 billion representing year-over-year growth of 48% to 50%. We expect transaction costs of $705 million to $715 million, resulting in revenue less transaction cost of $585 million to $595 million. This reflects the continued mix shift we are seeing in the business. We expect an adjusted operating loss as a percentage of revenue of 12% to 14% as we continue to invest in the long-term growth of our business and weighted average shares of approximately 285 million. Consistent with Max's remarks, Affirm does not assume a material impact from the rollout of Debit+. We also expect a very strong fiscal third quarter with GMV of $3.61 billion to $3.71 billion, total revenue of $325 million to $335 million; transaction costs of $187 million to $192 million and revenue less transaction costs of $138 million to $143 million. Adjusted operating loss as a percentage of revenue of 19% to 21% and weighted average shares outstanding of 290 million. In closing, we just posted an incredible quarter of growth and our team is seizing this momentum to continue to deliver on our mission. I'd like to add my thanks to the great work of all Affirm employees this quarter. Max and I will now open the line for questions.
Operator, Operator
Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session.
Ron Clark, Vice President of Investor Relations
Before we open it up for Q&A, I want to briefly address the earlier than customary issuance of our earnings press release today. Due to human error, a small portion of our Q2 results were inadvertently tweeted from Affirm's official Twitter account earlier today. And because of that we felt it was appropriate to release our full financial results as promptly as possible thereafter rather than waiting until after the market closed. With that, I'll turn it over to Doug to begin the Q&A session.
James Faucette, Analyst
Great. Thank you very much. I guess my first question is obviously, the December quarter was massive for you guys. But the outlook doesn't seem as comparatively strong, especially the March quarter and particularly, if we're now incorporating more split pay from Shopify and Amazon et cetera. Can you walk us through kind of that dynamic, especially on a sequential basis? I mean, is this seasonality more than expected drag from Peloton impact of revenue timing on Amazon and others? Just kind of help us understand the sequential evolution of the business?
Michael Linford, CFO
Yes, I'll take that. To begin with, we're very pleased with the pace of growth in the network. The results for Q4 were exceptional, making it a remarkable quarter. We're maintaining and even raising our guidance, which means our outlook is improving for the rest of the fiscal year. We're well beyond the high growth phase and currently in a hyper growth phase for the stock, and we're optimistic about our scaling efforts. While seasonality does play a role, with Q4 being particularly strong due to holiday shopping, we experienced an outstanding holiday season this year. There may be some sequential effects to consider. The growth in interest-bearing aspects may introduce some delays in revenue and margins for those originations. However, we're very satisfied with our growth pace and are focused on the long-term potential of this network over the next decade rather than immediate quarterly results.
James Faucette, Analyst
Michael, this question is likely for you, but both you and Max mentioned that there have been numerous inquiries about interest rates. Additionally, many questions relate to delinquencies. As you mentioned, you're nearing your target, but we observed in the latest supplemental update that the percentage of 30-day delinquencies has begun to decline from your 2% target in recent weeks. Is this change solely due to the nature of the new mix, such as from Amazon, or improved consumer repayments, or are you tightening credit standards? How should we anticipate this trend to evolve in the upcoming quarters?
Michael Linford, CFO
Very good question. If you look at the chart that we have in the supplement, you can see the seasonality curve of delinquencies and there's actually quite a bit of seasonality tied to both the shopping seasons and the repayment schedules have happened. And we're back to a more normalized seasonality curve with respect to what you see in delinquencies. And to reiterate the point, I mean we're very happy with the credit outcomes we're driving right now. And we take a very intentional approach here and we have intentionally been loosening the credit box over the past year. We're still below 2019 and 2020 numbers, fiscal 2019 and 2020 and feel really good about the level of delinquency in light of the total unit economics that we're driving. And the only other thing I'd add is that, we really do manage to a total portfolio number here. There's a bit of a misunderstanding we think out there with folks looking at not the portfolio delinquencies, but looking at one securitization vehicle or one particular slice of our business. We are very thoughtful about portfolio construction that goes into any one of our funding vehicles. And each one has a unique profile based upon market demand and our needs. For example, the split pay content may change. We made pledge loans that have sensor delinquency, et cetera. And so no one securitization, data set can really represent the portfolio and would really encourage everybody to look at our investor supplement to see a real view of portfolio-wide delinquencies.
James Faucette, Analyst
That's great, Michael. Thank you very much.
Timothy Chiodo, Analyst
Great. Thanks for taking the question. Michael, you touched on this a little bit in your prepared remarks in terms of slide 13, which has the merchant fee rates. And you're right, overall, most of the lines are pretty stable. I wanted to see if we could just touch on a few of them that are moving around a little bit, specifically the dark blue, which is the split pay seems to be ticking up a little bit in terms of the take rate. I was thinking maybe that could be related to Shopify, also the purple line which is the Core IB, just ticking down a hair maybe related to Amazon? And then if you could help us maybe elaborate on either of those and also the green the non-integrated virtual card would really appreciate that context?
Michael Linford, CFO
Yes, the area we have the least control over is the network interchange revenue we earn. You are spot on with your observations. The increase in the split pay merchant fee rates compared to Q1 was influenced by our promotional activities with Shopify, particularly in that quarter, as well as showing an increase year on year since fiscal Q2 in 2021. We are confident about our resilience in the highly competitive split pay sector. The IB figure you mentioned reflects growth from our largest enterprises, where our earnings are less than in other areas. We are optimistic about our growth due to the combination of robust growth in the split pay offerings that yield high merchant fees and significant user growth alongside our enterprise-scale solutions, which will lead to substantial processing volume and, we believe, strong long-term economics. We want investors to recognize that major shifts in our portfolio mix will affect how things appear on the income statement.
Timothy Chiodo, Analyst
Thank you. Point well taken there on the various mix dynamics. I appreciate it. Quick follow-up is on processing costs. So fully appreciate that the Shopify revenue share will hit in that line item, which could cause a little bit of upward pressure on that specific expense line, but a potential offset could be reduced card mix within their loan repayment. Is there any potential for you to work with someone like a Plaid or a Finicity to help increase the mix of direct bank account repayment?
Max Levchin, CEO
Yes, there is potential. I was starting to doze off because you were asking Michael excellent questions, and he's doing a great job answering. The longer it is, the more accurate it is. The way we view our transactional economics spans credit dimensions, primarily focusing on lifetime consumer management on the credit side. When operating on a return on assets basis, you must consider the charge-offs incurred. Michael articulated this well, and it aligns closely with my perspective. Essentially, we manage that to a specific number, targeting eight basis points per product, per merchant, and so on. After establishing that, we examine our other costs, with servicing being a key area where we are cautious, as we want to ensure an excellent consumer experience. Over time, we will aim to optimize that to an ideal number. The high-touch web services we offer are invaluable to us. We are very stringent on other costs, particularly repayment costs, which have significant room for improvement. There are many opportunities since repayment methods are not all equal. Exciting innovations are emerging beyond ACH, which is currently the most common and cost-effective option. We will certainly explore many avenues in this area. It's crucial for our current quarter and future reports that we continue to capture significant white space. The growth of our network is our primary focus right now. We are attentive to scaling costs to real dollar amounts and will invest in lowering these expenses, accurately identifying opportunities.
Timothy Chiodo, Analyst
Excellent. Thank you, Michael and Max.
Ramsey El-Assal, Analyst
Hi, guys. Thank you so much for taking my question this evening. I wanted to ask about the spread between volumes and revenue less transaction costs and just kind of get your expectations about where those yields should sort of trend and shake out over the next few quarters? Where do they exit the year? What should we think about in terms of next year modeling them out? If you could comment on that, that would be very helpful.
Michael Linford, CFO
We are not ready to provide guidance for 2023 at this time. However, the guidance you see and the results we just reported indicate that the long-term economics of the business are expected to be between 3% and 4% on a revenue-less transaction cost basis. Last quarter, we were on the higher end of that range and it aligns with our guidance for the latter half of the year. The product-level economics are changing rapidly; for instance, with a Split Pay product that has 5% to 5.5% merchant fees, achieving a four-point margin is unlikely, so we anticipate some compression in GMV percentage for the Split Pay business. Conversely, in our interest-bearing business, we can earn higher total revenue transaction costs over time. As we expand our enterprise partnerships, we will see some delayed benefits. Our guidance reflects the mix we expect in the coming six months, and we will provide an update on 2023 later this year. We remain confident in our long-term guidance of staying within the 3% to 4% range, which we believe is significantly better than our competition.
Ramsey El-Assal, Analyst
Okay. Can you provide your updated perspective on the longer-term pathway to profitability, especially considering the potential for faster growth with larger partners like Amazon and the decline of Peloton? Has your outlook, approach, or ability to achieve profitability at a consistent pace over the long term changed?
Michael Linford, CFO
No. I mean Max's line in the setup today, what I'd like to reiterate which is our strategy hasn't changed. We talked about the financial model and framework in September and that remains true, no matter the macro conditions changing. While we have the opportunity to grow at this pace with what we think are industry-leading unit economics, we're not going to take our foot off the gas and we're going to keep scaling up the network. And the path towards profitability, the long-term financial profile of the business remains the same and it is a function of us achieving scale greater than where we're adding human capital. Human capital is what's driving all of these we think fantastic results and we're still well prepared to keep investing into what we think is an incredible growth opportunity.
Ramsey El-Assal, Analyst
Great. Appreciate. Thanks so much.
Max Levchin, CEO
Just one more way of thinking about it that I guess I would utilize. And fundamentally just from going back to my experience odd years ago, pricing power of a payments network is directly proportionate to the number of active users it has. Like ultimately, when you come to market and say I have a product and I would like you to buy my way of delivering tender, the price that product is able to command is inevitably a function of how many people are using that product, prefer it, would like to use that to check out, whatever we want to call it. And so the reason we are so consumer growth and coverage obsessed isn't for some sort of a vanity number but the fact that ultimately we intend to come to market and say, we are the largest network. We are the most active network. We would like you to pay for that appropriately. And so this growth is a direct tie to the path to profitability.
Ramsey El-Assal, Analyst
I see. Great. So not too much has changed since your prior view despite other businesses evolve. I appreciate it. Thanks for your answers.
Dan Perlin, Analyst
Thanks and good evening, guys. I wanted to ask a question around the kind of frequency of repeat customers versus the first-time users. You have a slide on that a little bit. And the question is really the interplay there between your customer acquisition model and how we should be thinking about that influencing cost into the second half of the year and maybe even into next year?
Michael Linford, CFO
I'll start and then Max can add on. I mean I think we're actually – we included that slide in the supplement because we're really proud of what's going on underneath the surface, where we have a step change in the number of users 150% growth and increasing frequency when you have that much user growth is actually really challenging. And if you look at a chart and look at just the total transactions from repeat users and the growth there alongside the net new user growth. It is a really – which feels like a really good spot the business. There is some impact with respect to the rate of new user growth on unit economics. First time use tends to be slightly less profitable than the lifetime value of the consumer. And so you do have a little bit of start-up costs associated with that user growth. But as Max mentioned before, long-term, that's much more important to us. So we're going to keep adding users at a very aggressive clip. We're going to stay focused on that. And part of the reason we have so much confidence in the long-term economics is that's happening right alongside tremendous growth in repeat usage on the platform. And we talked about network effects in the business. That's what that means. And in the long run it gives us all the confidence in the world around where the economics will ultimately be.
Dan Perlin, Analyst
Yes. I thought that was a pretty impressive set of numbers as you think about growing the network that quickly to have that level of frequency so quickly. So – the other question I have is do you have any insight that you could share with us around kind of January trends in particular around the health of maybe some of the lower income cohorts that might be coming into the portfolio. I know some players out there have some concerns around what that dynamic is looking like. So if you could share any of those that would be great. Thank you.
Michael Linford, CFO
I believe what you saw in the disclosure regarding the delinquency trend reflects our current credit outcomes, which are influenced by our decisions on approval rates. There are certainly various seasonal factors that need careful consideration. However, we are not experiencing the broader weaknesses in overall credit performance that others have reported. I feel very positive about our current position, which is why we are confident in the guidance we've provided for this quarter.
Dan Perlin, Analyst
Great. Thank you.
Jason Kupferberg, Analyst
Hey. Thanks guys. So I just wanted to come back to this kind of general topic of we're adding $1.5 billion of GMV to the full year guide, but we're basically not changing revenue less transaction cost. I know you're talking about the interest-bearing loans and kind of the revenue recognition dynamics there. I mean how long is that lag typically? I mean, I think this is a dynamic that's kind of throwing people off a bit? And how much of this sort of dynamic is due to Amazon?
Michael Linford, CFO
Yes, Amazon is part of the equation. However, the growth rate with Amazon is just one aspect. As we mentioned, we still doubled our GMV excluding Amazon, indicating substantial growth across our entire portfolio, not just limited to Amazon. The interest-bearing portfolio is growing rapidly, which contributes to the effects we've discussed. Another notable influence on revenue less transaction costs as a percentage of GMV is the shift toward Split Pay, which generally operates at lower rates. This has been a consistent theme for us, as the product mix significantly impacts take rates on both revenue and revenue less transaction costs. Additionally, I want to emphasize that we're performing at the upper end of the range we've communicated, between 3% and 4%, and we are confident in our long-term unit economics. We believe we stack up favorably against others in our industry regarding the rates at which we're achieving results.
Jason Kupferberg, Analyst
Okay. And then, I guess just for the back half of the year, how should we be thinking about GMV growth excluding Peloton? Like, has your full-year expectation on telecom changed at all just given some of the challenges that they're having?
Michael Linford, CFO
Yeah. Our current guidance reflects all of our current thinking on where they're at. We had frankly a good quarter in Q2 above our internal expectations. And feel like they're still delivering an incredible amount of volume for us. And we admire their brand. And we admire the loyalty that they have amongst their consumers. And we'll keep partnering with them. We launched with them in Australia this past quarter. And we're going to keep helping them grow their business.
Andrew Jeffrey, Analyst
Hi, yes. I appreciate you taking the question. Maybe as it relates to Shopify, I'm still trying to sort of reconcile James' question a little bit too. I think you said, it will be 15% to 20% Split Pay will be about 15% to 20% of GMV this year. I guess, the first question would be, where do you think that can go? It's a pretty quick ramp, although, not totally out of line with our expectations. And then, the follow-up would be, it kind of implies based on your guidance that the rest of the business is growing about 45% volume-wise, which might be a little bit lower than we might have thought. Can you just address those two points?
Max Levchin, CEO
I will begin, and then Michael can wrap up. We won't disclose the exact percentage of Shopify Split Pay performance, but it is clearly growing robustly. Merchant adoption has been excellent, and demand remains high, so I believe it has the potential to increase further. We're not including this in our guidance, but Michael can clarify if I'm mistaken. There is significant growth potential here. For instance, Shop Pay does not currently support interest-bearing loans for shopping installments, which indicates that the service has barely scratched the surface.
Michael Linford, CFO
Yes. And so, 15% to 20% is a good number, how big could it be? It could be very big. Just like we have a launch of interest-bearing on Shopify. We haven't launched Split Pay with either of our two largest enterprise merchants. So I have a lot of confidence that that number can continue to go up. I think the only other point with respect to the rest of the portfolio growth is just, we are up against continued elevated levels in our call it a long-term zero finance business. And we would continue to expect some of that to be a drag on the balance of the portfolio, but not something that we're trying to, again, target a Q3 growth number. We're thinking about how this network scales and then how those network effects show up with repeat usage across the whole portfolio.
Andrew Bauch, Analyst
Hey, guys. I wanted to ask a question about the CFPB look at buy-now-pay-later. And from whatever you can share, is there anything you've garnered from those initial discussions that kind of give us a sense of how they're looking at the offering going forward?
Max Levchin, CEO
Sure. First of all, we cannot comment on their work. Over the last 10 years, we've maintained a strong moral approach to our business, including how we treat consumers and manage disputes. We have proactively encouraged regulators to establish clear rules and guidance for all players in the industry, which is positive. Our relationship with regulators is both important and serious. We are in communication with them and will respond to their detailed requests for information. The increased regulatory focus on this space is beneficial. I previously made a lighthearted comment about the information request, noting that they sought details on fees, late fees, and deferred interest. We reported zeros in these areas because we do not charge consumers for such items, and we take pride in our commitment to treating consumers fairly. I am confident that as more regulatory attention arises, we will comply with all necessary rules and perform well. It's too early to predict the future, but we are eager to engage.
Andrew Bauch, Analyst
That’s helpful. Thank you. My follow-up would be is there any kind of guidepost that you're going to give us from a macro perspective what you're embedding in the outlook for unemployment, inflation and rates. And I appreciate the color on the interest rate moves to the impact of the model, but just kind of thinking about what a baseline number that you're embedding in your assumption would be?
Max Levchin, CEO
Yes, I understand. The last one was yours, but I believe there’s a common misunderstanding about our products, especially since they tend to be more popular outside of traditional finance. When interest rates increase and prices rise, our product actually becomes more valuable. For someone trying to manage their budget and facing confusion with credit card rates going up, Affirm provides clarity and a straightforward payment plan without late fees. Often, the seller will even cover any new interest costs. For example, if your credit card rate has increased by 5%, a 0% rate offered by a seller at a homeware store through Affirm becomes significantly more appealing. As inflation rises, our product proves to be more powerful and useful, effectively meeting consumer demand. On the other hand, when the government responds to inflation by raising rates, this typically acts as a tailwind rather than a headwind for us. I'll stop here, and Michael can explain what actions we've taken regarding this.
Michael Linford, CFO
Yes. Just the total avoidance of doubt, all of our outlook reflects the forward curve. And so there's roughly 180 basis points of rate increases. We take that into all of our models when we give guidance. It's consistent with the market expectation of rate movement. And so we talk about rising rates. That's not a problem for us at all. That's already reflected in the guidance.
Bryan Keane, Analyst
Hi, everyone. I appreciate you taking the questions. I have a couple of clarifications since it's been mentioned several times. The implied revenue transaction cost take rate in your Q2 guidance was around 5%, but it actually came in at 4.1%. One of the surprises seems to be related to the growth in the Shop Pay business. Did you not anticipate its growth would impact the numbers this significantly? I'm trying to understand the difference between the guidance and the actual results.
Michael Linford, CFO
Yes, that's right. The mix impact of the business the growth that we saw which was obviously well in excess of the guidance that we had given in the quarter tended to mix towards either lower revenue transaction costs take rates as a percentage of the total or tend to be a little bit more back-end weighted. And both those two effects caused the percent to go down, despite the fact that we did of course beat the guidance on a dollar basis.
Bryan Keane, Analyst
Got it. The follow-up question we often receive is about the profitability of larger contracts, such as those with Amazon or Shop Pay. How should we approach that? Typically, these terms are negotiated with larger merchants who tend to push for the best pricing. As a result, most pricing is set based on small and medium-sized businesses. I'm trying to understand that relationship better. Thank you.
Michael Linford, CFO
Yes. If you look at the merchant take rate slide again in the supplement, you'll see that we're doing quite well on the Split Pay business with respect to our ability to continue to earn good fees. We're not breaking out profitability by a partner. But I think a key part of the reason we were able to deliver these exceptional enterprise experiences to the largest merchants is the fact that we're not just reliant on merchant fees. The fact that we do have consumer interest in the economic model does allow us to get to the merchant fee clearing rates that work for the largest enterprises while still delivering really strong unit economics.
Dan Dolev, Analyst
Hey, thank you for taking my question. I just have a question regarding kind of where you are in terms of GMV and what's implied in the guidance? I'm still trying to get my head around the massive beat in the quarter. And then you seem to be guiding kind of in terms of a sequential basis so much lower GMV. I just want to make sure that this is hopefully a sign of conservatism and that there's the question we're getting a lot from investors this evening, is that there's maybe something else that got weaker. So we just want to reassure ourselves and investors that this is simply being conservative given the strong results?
Max Levchin, CEO
First of all, I think Michael already mentioned this the seasonality is a significant component of this business. And so that's an important piece of the puzzle. I'm not sure exactly what you're asking about, in terms of something that may have gotten weaker not from our point of view. I think we've done fine and not anticipating weakness. But we try to make sure that we promise and deliver as opposed to promise and underdeliver and see what happens. That's probably a philosophical approach we take out there.
Dan Dolev, Analyst
Got it. Yes. Sorry I didn't mean to sort of harp on it. If I look at sort of pre-COVID kind of trends on a GMV basis it doesn't look like at least like Q3, Q4 weaker. That's why I asked the question but...
Max Levchin, CEO
The previous quarter was exceptionally strong. Regardless of what we say about the next one, it won't measure up to this performance. Our transaction volume has experienced significant growth; I believe we've tripled the transaction count compared to last year for Black Friday and Cyber Monday. We haven’t seen this level of growth in any similar metrics for our company. The growth in GMV and transactions has accelerated considerably, and we will continue to analyze and expand further.
Vincent Caintic, Analyst
Hey. Thanks for taking my question. And thanks for all the details on the credit trends, all the slides there. I just wanted to follow up on that. I guess there's this concern about credit normalization and how it impacts the business, if at all. And so looking at the slides, the delinquencies still below 2019, but getting there the net charge-off as well. Just wondering as you're thinking, if credit is normalizing, how does that impact the business? And if you can describe some of the offsets that you mentioned earlier like the optimization, the merchant pricing and so on that would be helpful. Thank you.
Max Levchin, CEO
I’ll begin, and then Michael can add his thoughts. I want to emphasize that we carefully select the delinquency number we publish, considering compensating factors and unexpected events. Our objective is to reach a target we are comfortable with, and in hindsight, we may have been overly cautious or excessively stringent. Consequently, we purposefully relaxed our approach. As you've observed, we've now arrived at a range we prefer, and we will continue to manage it. There will always be fluctuations in consumer behavior, influenced by factors like the winding down of stimulus and various microeconomic events. We handle a substantial number of transactions, which allows us to differentiate our approach at any given moment. This means we maintain control at both the product and consumer levels. Moreover, not operating as a line of credit enables us to tailor our offerings to specific transactions. We will persist in striving for the outcomes we seek for our margins. The realities of the macroeconomic environment affect our willingness to navigate uncertainties. As we analyze macroeconomic data, we will adjust our willingness to operate within certain parameters. However, it is challenging to respond to broader consumer trends since demand for our product often exceeds our approval rate. In many cases, it’s not wise for certain consumers to borrow from us due to our lack of guardrails, such as no late fees. Therefore, the appetite for our product significantly surpasses our readiness to take on risk, and we will keep managing our offerings accordingly.
Vincent Caintic, Analyst
Thank you. Following up on that, it seems you consider credit variables in your decision-making. If there were a broader credit issue, it doesn’t sound like it would significantly affect volumes or merchant pricing, which should remain stable, as your product may actually become more valuable in that scenario. Could you discuss the inputs and outputs related to this?
Max Levchin, CEO
In the early days of the pandemic, we approached our merchants with the belief that the macroeconomic conditions would deteriorate before improving. There was significant uncertainty surrounding this situation. For those concentrated on profit margins, we indicated that credit adjustments would result in slightly decreased approvals. Our focus was on marginal changes, which could fluctuate. However, for those prioritizing revenue, it varied depending on the margins within the merchant's offerings. Some merchants produce their own goods while others resell purchased items. The margins they maintain can help enhance our approval rates, allowing us to operate in a range where the model suggests repayment capability isn't guaranteed. During the pandemic's initial phase, we were able to implement substantial price increases across our merchant base because the products we offer to consumers during uncertain times are highly valued. Overall, while macroeconomic conditions can encompass numerous factors, when the economy fluctuates and consumers require greater credit access, many of our partners are willing to pay more for these services to facilitate transactions. The assurance and control we provide enable them to sell their products effectively. Thus, while it may seem simplistic, macroeconomic uncertainty actually fuels demand for businesses like ours. If everyone were able to spend freely due to government stimulus, they might choose to pay cash. Consequently, the reduction in various stimulus measures has resulted in a net positive impact on our business, both in terms of consumer demand and merchants’ readiness to invest in our services.
Vincent Caintic, Analyst
Okay, perfect. That’s very helpful commentary. Thank you.
Chris Brendler, Analyst
Hi, good afternoon. Thank you for taking my questions. I want to start by discussing expenses. There have been significant sequential increases in all the non-GAAP expenses related to technology sales and marketing. I would like to understand whether this increase is connected to the ramp-up of some partnerships or if we should consider this expense growth as a baseline. I know you have provided operating income guidance for the near-term, but I'm curious about the pace of expense growth and would appreciate any further details on the nature of this growth. Thank you.
Michael Linford, CFO
Yes. Characteristic is mostly human capital combined with marketing investments on the non-GAAP side. On the GAAP side, there's also the impact associated with stock-based compensation, D&A, and the other non-cash items. I think we will stand by our long-term guidance that we gave in September around the profitability of the business being a function of the growth rate. So, while we're growing like this, we are going to keep investing in that human capital to build great products and delight consumers. And when and if that growth rate ever starts to slow down, you'll see us grow expenses much slower and begin to deliver positive adjusted operating income. I think of the profitability or bottom-line measures that we really manage to, the adjusted operating income number is what we intend to hit. It's where we have the guidance out for you for this period and that's the number that we think will become scaling up and down as growth rates change.
Chris Brendler, Analyst
Okay. Thank you. And I guess another boring question Michael is the just the health of the debt markets I know you continue to use securitization both on and off balance sheet. It looks like you sold some more whole loans this quarter. Balance sheet growth actually came in a little bit below our estimates. Just is it still as healthy as it was given your increasing traction among fixed income investors, or has there been a bit of pullback given the macro conditions?
Michael Linford, CFO
No, I think we still continue to have very well-received deals in the market both single counterparty deals and our forward flow relationships. As I mentioned in the script, we had a great deal of capacity by adding new partners and upsizing existing ones. And we still continue to receive a lot of demand for the assets. And our securitization activity has also been very successful. And you're going to see us continue to be very, very active there in both of those two markets and levers to continue to grow our business and deliver we think again excellent capital efficiency.
Chris Brendler, Analyst
Great. Congrats on the results as well. Thank you so much.
Operator, Operator
Ladies and gentlemen, this concludes our question-and-answer session. This also concludes our call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.